How to Pay Off Debt with a Home Equity Loan

Posted by: Henry B. | Apr 18,2008


One of the best ways to pay off credit card and other debt is through a home equity loan.  You borrow off of equity, pay off all your debts in one lump sum, and then pay off the home equity loan – normally for a lower interest rate than all the other debts combined.  Even if it doesn’t have a much lower rate, it can still be a great help by raising your credit rating by eliminating credit balances.  You’ll also have freed up space on your credit card, should you need it.  

But hold it.  Stop right there.  It’s this last issue that causes a lot of trouble for people.  For many people, there’s nothing more tempting than an empty credit card.  You’ll be led to think: what’s one purchase?  And then another.  And another.  Soon you’ve revived your credit card debt in addition to what you’re paying for the home equity loan.  Your problem has worsened.  

If you do you go through a debt repayment strategy such as a home equity consolidation loan, you’ve got to be smart about how you spend from this point forward.  The same goes for transferring a balance to a 0% APR balance transfer card.  The major mistake that cardholders make is then putting new charges on the balance transfer card.  When you enter into a debt payment strategy you have to change your financial habits as well.  

In short, just getting a loan or transferring a balance is not enough.  What you really need to do is stop your credit spending as much as possible.  Because look at what will happen if you don’t.  You’ll no longer have the equity to take out another loan.  Your debt payments could double.  This is the type of thing that leads to bankruptcy or foreclosure.  Be careful.  A debt consolidation loan isn’t a way to clear away your credit so you can use it again.  It’s a way to get out of debt and keep out of debt.  Once the equity loan is paid off, you have the freedom to use your credit again, but hopefully you’ve learned some good habits in the meantime to never overspend on credit.  

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