How can excessive credit card debt be reduced? A home equity loan is one way. Several good reasons exist to refinance your home to pay off credit card debt. First, the interest paid on a home equity loan is fully tax-deductible up to $100,000 worth of debt; credit card interest is not tax deductible. Second, the current interest rate on a home equity loan is approximately 9%; typically the rate is one to two points above prime. Credit card interest rates can range from 15% to 22%.
Home equity loans are not always the answer, however. First, not every homeowner can qualify for a loan; furthermore, mortgage insurance may be required if equity falls too low due to the home equity loan. Second, credit card debt is typically paid within 15 months; the duration of a home equity loan is usually much longer.
There is also a risk in reducing credit card debt. The extra money from the home equity loan and a �clean� credit card can create an urge to spend anew. This can result in two debts, credit card and mortgage debt. Problem exacerbated.
To illustrate the overall benefits of a home equity loan versus credit card debt, assume credit card debt of $15,000 at 21% interest is carried for five years. The total balance paid at the end of the term is $24,346 (assuming monthly payments of $406). In contrast, a home equity loan of $15,000 at 9% interest carried for five years results in a total balance due of $18,661 (assuming monthly payment of $311). The difference is a savings of almost $5,700. Additionally, the interest payment on the home equity loan may be deducted for income tax purposes.
Are there other solutions to credit card debt? Nonprofit counselors may help in getting debt under control by structuring a budget and instructing consumers on long-term money saving strategies. However, there is usually a fee for such services.
Depending on your financial situation, a home equity loan may be a realistic solution for reducing credit card debt. However, the best strategy may be to save for purchases and to pay credit card balances in full each month.
– Leslie Heffernen