If you have a large outstanding debt on one or more credit cards, you may be struggling to bring your debt down. It can take years of making the minimum payment to actually zero out the balance. This is because interest accounts for such a large portion—as much as half—of each payment issued. Also, since most credit cards have variable interest rates, minimum payment amounts frequently increase, as rates climb higher.

The process of paying off credit card debt becomes even more complicated when multiple credit cards are involved. Varying monthly payment due dates—coupled with different minimum amounts owed—can make the credit card game a thorny situation. But fortunately, if you own your own home, and you have some solid equity built up in it, you can apply for a home equity loan, which you can in turn use to pay off your credit card debts.

Key Takeaways

  • Those with massive credit card debts may struggle to bring down their balance, despite religiously making minimum monthly payments. 
  • Individuals with equity built up in their homes may wish to apply for a home equity loan, which may be used to pay off credit card debt.
  • Home equity loans offer the advantage of low interested rates, which are often modestly higher than primary mortgage rates.
  • Taking out a home equity loan may be too risky a prospect for some people, who fear losing their homes, in the event that they default on the loan.

Home Equity Loans

Before considering a home equity loan as a strategy for paying off credit card debt, there are a few important characteristics of this type of loan to consider. The most important aspect is the risk you take on when securing a loan with your home as the collateral. In the event a borrower is unable to repay the loan, there's the possibility that your house may be seized and sold by the lender (in order to collect on the funds you owe).

For many families, the prospect of losing their home can deter this from considering this type of loan. While credit scores are repairable, uprooting your family due to a foreclosure on your home can be an unimaginable, permanently scarring event. Moreover, a home equity loan can also and up being vastly more expensive than a similar debt consolidation loan, because it requires a home appraisal (along with other fees typically associated with primary mortgage transactions).

A home equity loan is typically referred to as a HELOC, which stands for a home equity line of credit.

On the other hand, one of the great advantages of using a home-equity loan to pay off credit card debt is the low interest rate afforded to these secured loans.

Most home equity loan rates are just a step higher than primary mortgage rates, and they are usually much lower than average credit card interest rates. Therefore, using a home equity loan can help you pay off your credit card debt much sooner, since less money may be funneled towards drawing down accrued interest.

In the past, the interest charged on a home equity loan was tax-deductible. This was an additional incentive for using this strategy. However, HELOCs are now wrapped into the total limit on tax-deductibility that was introduced by the Tax Cuts and Jobs Act of 2017. Previously, taxpayers could deduct the interest expense on up to $100,000 ($50,000 for married filing separately) of home equity debt secured by your home, whether in the form of a regular loan or revolving line of credit.