Using a HELOC to Pay Off Debt: Here’s What You Need to Know
It may seem tempting to pay off your credit card debt all at once if you have a lot of it. Some people find the best way to do so is with a home equity line of credit (HELOC). A home equity line of credit can be used to pay off old debts and consolidate new ones, and HELOCs usually have much lower interest rates than credit cards. However, there are risks associated with using a HELOC, including losing your home. The following information will explain how to make use of a HELOC to repay credit card debt.
What is a HELOC (Home Equity Line of Credit)?
If you have equity in your home, you can use a home equity line of credit, or HELOC, to get funds. Home equity lines of credit do not require that your home be fully paid off.
A HELOC works by providing you with a line of credit based on a percentage of the value of your home, minus what you owe on the house. You can get $300,000 in credit if, for example, your home is worth $800,000, but you still owe $100,000. By taking out a HELOC at 50 percent of the value of your home and subtracting the $100,000 you owe, you can obtain $300,000.
You can borrow money from a HELOC, pay it back, and borrow again. Revolving credit is similar to a credit card. The key difference between a HELOC and a home equity loan is the fact that the latter offers a single lump sum that must be repaid within a set timeframe.
An average HELOC lasts for about 25 years, including both a draw period and a repayment period. It is possible to draw money from your line of credit during the draw period, which can last for up to 10 years. In the repayment period, which lasts through the remainder of the HELOC’s term, you will no longer be able to withdraw money from the line of credit and must repay any debt you incurred.
During both the draw and repayment periods, you will be paying interest on your HELOC, so shop around beforehand to secure the best interest rate.
Some Questions to Ask Lenders
If you want to qualify, what do they require from you?
Can they offer you the best rate of interest?
If your interest rate increases, how much notice will you receive?
What fees are involved?
Can you consolidate credit card debt with a HELOC?
Consolidating your credit card debt and paying it off quickly with a HELOC is a commonly used method. You can pay off your credit card debt by applying for a home equity line of credit. The money you owe on your HELOC will still have to be paid off, but you will have a longer period of time in which to pay it off and the interest rate on your HELOC will likely be lower, saving you money in the long-run.
Benefits of Paying Off Credit Card Debt With a HELOC
If you have multiple credit cards, you can pay off all of them at once. A HELOC lets you pay your credit card debt entirely at once instead of in bits and pieces (like via the snowball or avalanche methods). Using a home equity line of credit to pay off your credit card debt can provide significant mental relief if you are currently overwhelmed by debt.
You Will Have a Lower Interest Rate
Most credit card’s charge interest rates around 17 percent. A typical home equity line of credit has an interest rate of 6 percent. It is important to remember that HELOC interest rates are variable, which means they can go up or down depending on the prime rate. Yet even if your interest rate goes up, it will still be much lower than credit card rates.
Disadvantages to Using a HELOC to Repay Credit Cards
If you don’t practice healthy financial habits, you may find yourself right back in the same situation once you pay off your credit card debt. Nobody pays off their credit card debt with the intention of getting back into debt right away, but you may be back right where you started. A HELOC can be used to pay off your credit cards, but if you then accumulate a bunch of credit card debt, you’ll have to pay both the credit card debt and the HELOC debt. Depending on your financial situation, that might exceed your capabilities.
Your Home May Be at Risk
HELOC debt is secured debt, meaning the lender can claim whatever you put up as security if you fail to pay it off—in this case, the home. In the event that you don’t pay back the principal within the designated time period, you run the risk of foreclosure when you take out a HELOC.
Can I cancel my home equity line of credit?
It is not possible to cancel your home equity line of credit until you have paid it off. You usually have 10 days to cancel your loan if you provide written notice. For more information about cancelling, see your terms and conditions.
The Bottom Line
There are other tools available that can help you consolidate and pay down your debt quickly. During an introductory APR period, you may be able to pay off existing credit card debt with a balance transfer credit card or zero interest credit card. Once you start working with a reputable debt counselling service, this can also make it easier to manage your finances and pay off your debt over time. In order to repay your debt, you have a variety of options, one of which is taking out a home equity line of credit to pay off your credit cards.