Debt Consolidation

Using a home equity loan to replace various credit card and other high-interest debt has several advantages. The interest rate you pay on your average home equity loan is lower than the interest rate you will pay on your average credit card by 7% to 10% or more. The interest you pay on a home equity loan is tax deductible where as the interest you pay on credit card debt is not. A single payment on a home equity loan can simplify paying several credit cards with different lenders and staggered payment times.

Let’s say you have $20,000 in credit card debt at 18%. If you are making a monthly payment of $450 (50% more than the minimum payment of $300), it will take you 6 years and 1 month to pay off that debt and you will pay $13,045 in interest. Using a home equity loan at 8%, you can make the same payment and pay off that debt in 4 years and 4 months and pay only $3,732 in interest. This means that you have saved over $9,000 in interest. With the home equity loan scenario, if you are in a 30% tax bracket, you will also save over $1,000 in taxes on the $3,732 you will pay in interest.

A home equity loan can also help make spiraling credit card debt more manageable by spreading out the payments over a longer period of time. If a home equity loan is used for this reason, you should consider the fact that you may be paying more in interest over the long run if you make smaller payments.

When a home equity loan is used for debt consolidation, you should have a plan for how you will avoid incurring future debt.