Deep debt is a scary situation. One of the most frequently asked questions we here at Van Horn Law Group is from homeowners who are asking, “Should I pay off credit card debt with home equity?” It’s a big question, a big decision, and the only answer I can give is, “It depends.” As with all questions about debt, there are nuances and details that have to be considered before moving forward. Let’s break it down.
When you have a mortgage, the house is technically yours though the money you used to pay for it belongs to the bank. Over time, you gradually pay down the amount owed and your equity increases. When you have enough equity in the home, then it is possible to get a HELOC – which stands for home equity line of credit – or a home equity loan. A HELOC is not a loan but a type of revolving credit just like your credit cards. People have used their HELOC or home equity loan for many different purposes including medical bills, buying a new boat, or as a temporary float during tough economic times.
Prior to 2018, using both HELOC’s and home equity loans to pay down credit card debt was popular because the interest was tax-deductible. This is no longer the case. There are conditions for using the proceeds of a home loan or HELOC that make it less attractive for paying down debt. In short, interest is deductible only when the money is used to make capital improvements to the home.
One of the considerations for using a HELOC or home equity loan to pay down credit card debt is that the interest rates are significantly lower than those offered by your credit card. It may not be tax-deductible, but the interest rates offered for a 80% loan-to-value ratio can be as low as 3%, but generally way in between 5% and 6%. If you have enough equity in your home, this is a very good proposition especially when weighed against the average credit card interest rate of around 17%.
One of the primary considerations should be taking a look at your overall debt versus your reasonably expected income. If you are struggling to meet even everyday expenses such as food, gas for the car, and personal care expenses, having way to immediately obliterate a large chunk of those debts can look terrific. However, before proceeding, you need to ask yourself how you will pay down the HELOC credit or loan money that you use. Yes, you will save a fortune on interest rates, but these funds need to be repaid and in the case of a home equity loan they need to be repaid on a timeline between five and 15 years.
There are other approaches to paying off credit card debt, including using credit cards to pay off other credit cards, taking out a consolidation loan, and of course our favorite snowflake, snowball, and avalanche approaches to paying down debt. However, for those asking, “Should I pay off credit card debt with home equity?” The answer is, “Just because you can does not mean that you should.”
When debt is overwhelming, there is a constitutionally protected remedy that allows people to discharge their debts in a court of law either through liquidation or restructuring. Bankruptcy needs to be a solution on the table when your debts have become so overwhelming that you don’t see how you can possibly meet daily expenses and necessities. Bankruptcy has protected classes of property that can include homes. For this reason, and because debt is such a complicated legal concept, I strongly urge anyone thinking of using their home equity to get on top of their debts to consult with an attorney well-versed not only in bankruptcy but in handling debt.
That would be Van Horn Law Group, where we really understand and sympathize with our clients who are in a spot that they never thought they’d be in.
Getting a Grip
Getting all of your financial paperwork in one place is a necessity. This first step helps you to understand your overall financial picture of debts versus assets and income. It is important to be strictly truthful with yourself on this first step, otherwise you may make missteps that can get you even deeper in debt. It’s also important to stop using credit cards in the cycle of making payments, using the credit cards to the max, and then making payments again. At this point, your credit cards should only be used for a dire emergency.
Lifestyle changes are important too. They can be as simple as bringing your lunch to work, forgoing a bar-crawl on a Friday night or brunch on Sunday morning, but can also include downsizing to a smaller and more affordable home or refinancing your automobile. You can also offload excessive and expensive positions at a variety of sites online from eBay to 1stDibs.com and Poskmark.com. Little steps in big can help to retire your debt or at least pay it down to manageable proportions that don’t preclude a night on the town or a coveted fashion item.
At Van Horn Law Group, we deal with debt. It is not our sole focus, but it is one of our specialties. Bankruptcy by its complex nature in both local and federal law is a specialty practice. We are here to help people through the rough patches and into a debt-free future. Our offices in West Palm Beach and Fort Lauderdale are open Monday through Saturday, and by appointment on Sunday. We welcome walk-ins, and your first consultation is free. Get in touch with us and find out the best approach to handling your debt either with or without bankruptcy.
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