Should You Use Home Equity to Pay Off Debt?

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Should you use home equity or try an alternative way to pay off debt?
- Will this plan allow me to pay off my consumer debt within five years?
- Is my total debt less than half my gross annual income?

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What are the pros and cons of using home equity to pay off debt?
- Interest rates on home equity loans and home equity lines of credit, or HELOCs, are typically lower than those on credit cards.
- The fixed rates on home equity loans give you predictable payments.
- You won’t have to give up a low mortgage rate.
- You're using your house as collateral, and you risk foreclosure if you can’t pay.
- If your home’s value drops, you could wind up owing more than it’s worth.
- Repayment terms can be 10 years or longer.
- The loan isn’t a quick fix for dire financial situations.
- Credit card debt is more easily discharged in bankruptcy.
Should you get a home equity loan or HELOC?
Home equity loan
- Usually offers a low, fixed rate.
- Fixed loan payments can be easier to budget for than variable credit card payments.
- Know your loan’s exact payoff date.
- Upfront closing costs can be high.
- You generally need a credit score of 620 or higher.
- Home equity loans are less flexible than HELOCs.
HELOC
- Usually a low, variable rate (although some lenders offer a fixed-rate option).
- Some have no or low closing costs.
- Adjustable rates mean payments could go up.
- Harder to budget for.
- Easy access to a credit line can sabotage budgeting efforts.
- Interest-only payment options can lead to deeper debt.