Does it make sense to use a home equity loan to pay off credit card debt? As with anything, the answer is sometimes. While proponents of certain mortgage payoff acceleration loans might disagree, David Bach is offering some good reasons to let your home equity build without the burdens of extra loans or lines of credit hanging off your equity.
Here is David Bach’s first tip for exuding savviness with your home equity.
1. Don’t rely on home loans to pay off credit card debt.
In my experience, when people borrow against their homes to eliminate credit card debt, they typically just slide right back into it — at the same level or worse — within two to three years. That’s because even after wiping the slate clean, they don’t change their spending habits. They max out their credit cards all over again and find themselves in an even deeper hole.
Is it possible to use your home equity to pay down debt and then stay out of debt? Of course, but generally those disciplined enough to pull this off don’t let their credit cards run amok in the first place.
For the record, from what I understand, David Bach’s experience is dealing with people who seek him out for his financial advice. Therefore, he might be exposed to a lopsided view of the general population. It is hard to ignore the fact that a home equity loan at a lower interest rate will sound attractive to anyone with a lot of credit card debt. I say go ahead and consolidate if doing so will only eat a small portion of your equity, but don’t do so until you’re truly ready to get out of debt. That means you’ll need to change your habits, a hard thing to do if you’re not mentally prepared. Some of the points in 6 Steps to Building a Better Snowball might be helpful before playing around with moving credit card balances.
Mathematically, it can be enormously beneficial to consolidate high-interest credit card debt with a low-interest loan. The brain isn’t ruled by numbers in all cases, so if you continue spending more than you can afford, up to your newly restored credit card limits, you’ll just dig yourself a bigger hole. David Bach thinks that this is the most likely case and will prescribe advice for everyone in that fashion, but I believe it depends heavily on the individual.
Seven Ways to Be Home Equity Savvy [David Bach]
Published or updated August 15, 2007.