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Changing Credit Card Debt To Home Equity Debt Staff - Mortgage Lenders Plus.com

Part of the refinancing frenzy that has swept the housing market over the last five years has come from homeowners intent on credit card debt consolidation using with cash from a home equity loan or line of credit. It’s a reasonable concept, if done properly. Setting aside the difference in interest, it is also true that the interest on a home equity note is tax deductible while credit card interest is not. The home equity refinance is not, however, an option open to every homeowner or even a particularly wise choice unless it’s accompanied by a change in spending behavior.

The simple math makes using home equity an obvious credit card debt solution. The average credit card interest runs around twelve percent, while a fixed rate home equity loan is slightly in excess of seven percent, with a variable loan at six percent plus. Operating under the assumption that your current credit card debt problems are the result of excessive spending, it’s probably wise to avoid putting yourself in a position to continue doing so. That’s why it is wiser to use a home equity loan for your credit card debt consolidation than a home equity line of credit.

A line of credit is just further temptation to engage in debt-financed spending. That’s the problem you’re trying to solve. So one of the primary changes you need to make as part of your credit card debt solution is to call a halt to spending on credit. One way to reduce the temptation is to cut up most of the cards; another is to opt for a loan rather than an equity line of credit.

If you’re going to tack debt on to your home mortgage, perhaps it’s wise to look a little more closely at your budgeting technique. It’s possible that a fair amount of that credit card debt is for monthly expenses that for some reason, you couldn’t meet. With your new loan your budget is going to have to be tighter than that, or you’ll have no credit card debt solution at all. Create a realistic home budget and stick to it; you’ll have a larger mortgage payment to fold in and it would be wise to create a savings account as well. That will lead to fewer sudden expenses that require a credit card.

It is also possible that you don’t have enough equity in the house to get an equity loan. Most home mortgage lenders draw the line for homeowner debt at eighty percent of the home’s value. If your equity is twenty percent of the home’s value or less, you have nothing to borrow against. Your loan must be in the amount of equity that you have exceeding twenty percent. It would be wise to engage in a little home-grown credit card debt consolidation by setting the cards aside and budgeting a monthly amount to pay down the debt – but that may be as far as you can go.

Credit experts make the point that closing down a lot of credit accounts can damage your credit rating – that keeping them open and paid down is the optimum situation for your credit rank. That may be true – but if it requires discipline you don’t have, part of your credit card debt solution may be credit card destruction.