Homeowners might consider leveraging their home equity to pay off credit card debt, especially given the soaring home prices and mortgage rates that, although higher than before, remain lower than most credit card interest rates.

But should they?

The answer isn’t as straightforward as it might seem.

Your Home Is at Risk

Home equity loans or Home Equity Lines of Credit (HELOC) are ways to borrow against the equity in your home. “Equity” refers to the portion of your home’s value that exceeds the balance of your mortgage and other home loans.

For example, if your home is valued at $350,000,andyouhavea$200,000 first mortgage and a $50,000secondmortgage,thenyouhave$100,000 in equity.

Home equity loans typically come with fixed terms, interest rates, and payments, while HELOCs often have variable rates and flexible payments.

To qualify, you’ll need good credit and a significant amount of home equity.

Either option doesn’t require refinancing your primary mortgage, nor does it sacrifice the rate, term, or payment you’ve secured for that loan.

Since housing loan rates are usually lower than credit card rates, using a home mortgage to pay off credit card debt can save a lot of interest expenses.

However, there’s a significant risk: you could lose your home.

Credit card debt can be secured or unsecured. By definition, a home loan is secured against your home. That’s why their rates are lower. However, if you fail to repay such a loan on time, your lender may foreclose and seize your home as repayment.

For credit card debt, missing a payment might trigger late fees or higher interest rates, but your home will never be at risk.

You Could End Up with an Underwater Mortgage

Another concern is a downturn in the real estate market. Whenever your home’s value drops, you might end up owing more on your mortgage than your home is worth. This scenario, sometimes called an underwater or upside-down mortgage, can make it difficult to sell your home.

Adding a second loan or HELOC during a market downturn could increase the likelihood of owing more than your home’s value.

You should also remember that housing loans typically involve fees and closing costs. Loans advertised as “no closing cost” often have higher Annual Percentage Rates (APR), incorporating costs into the interest rate.

Either way, costs can offset some of the interest savings. In the end, you might pay more in fees than expected, and it could take longer to clear your debt.

If you habitually spend beyond your means with credit cards, using a home loan to zero out your credit card balance might create a perverse incentive to continue overspending. Over time, you could accumulate more debt, potentially harming your financial situation and credit score.

Three Other Ways to Pay Off Credit Card Debt

Fortunately, there are other strategies to help you pay off credit card debt.

1. Prioritize Paying Off Credit Card Debt

Paying off credit card debt with your current income might seem challenging, but many people manage to do it, and perhaps you can too. Two popular methods, the avalanche and snowball methods, might help you get started.

Method 1: Avalanche

List all your card balances and the APR you’re paying on each balance. Sort the balances by APR from highest to lowest.

Each month, pay at least the minimum on each card to avoid late fees and penalties, and allocate the maximum payment to the card with the highest APR. After paying off the highest APR card, repeat the process until you clear the balance on your card list.

Compared to the snowball method, the avalanche method might save you money and enable you to pay off credit card debt faster.

Method 2: Snowball

List all card balances and sort them by the smallest balance first.

Each month, pay at least the minimum on each card to avoid late fees and penalties, and allocate the maximum payment to the card with the smallest balance. After clearing that card, repeat the process until all cards are paid off.

Compared to the avalanche method, the snowball method might give you more motivation since you’ll first eliminate the smallest balances before tackling larger ones.

If you’re unsure which method to use, try paying off the debt on one card using one method, then try the other method for the second card. Then, continue alternating or stick with the method you prefer.

2. Get a Balance Transfer Card

Another method to pay off card debt is using a balance transfer card, offering low or 0% interest rates for up to 24 months. This type of card allows you to transfer your current balance from your current card to the new balance transfer card.

This method isn’t a perfect solution but can help you consolidate multiple card payments and pay off debt faster.

Considerations for Balance Transfers:

The amount you can transfer might have a cap.
Promotional APRs typically have an expiration date, after which the card’s full APR will apply to any remaining balance.
Balance transfers usually incur a fee of 3% to 5% of the transferred balance. For a $5,000transfer,3$150 to $250. This fee is usually deducted from your card, so your balance will be slightly higher after the transfer.

Before accepting a balance transfer offer, be sure to read the fine print. Ensure you understand the fees and APR for transferred balances and any new purchases. Plan to pay off the balance before the promotional APR ends.

If you’re approved for a new balance transfer card, you might also get other nice offers, such as no annual fee, low or 0% promotional APR on new purchases, or attractive rewards programs.

3. Apply for a Personal Loan

Using a personal loan to pay off credit card debt might be wise if the loan’s interest rate is lower and the monthly payment is manageable. One benefit of this method is consolidating multiple payments into one, making your debt easier to manage.

Suppose you have three cards with a total balance of $20,000andatotalAPRof27.99$1,098 a month. You make no new purchases with these cards. After two years, you’ll have paid $5,641 in interest.

Now, suppose you apply for a $20,000personalloantopayoffcreditcarddebt.Theloantermistwoyears,withanAPRof11$932. After two years, you’ll have paid $2,372ininterestfees.Youmightalsoneedtopayvariousfeesfortheloan.Thetotalinterestandfeesmightbelessthan$5,641.

Pros and Cons of Debt Consolidation

Whether you use a housing loan, personal loan, or balance transfer card, debt consolidation has some common advantages and disadvantages.

Advantages might include:

Lower overall APR.
Fixed interest rates and terms.
Reduced monthly payments.
Paying off debt sooner.
Paying less in interest expenses.
Freeing up funds to pay off other debts, build savings, or meet other financial needs.

Disadvantages might include:

Not being able to pay off debt as quickly as you hoped, or at all.
Not achieving the interest savings you expected.
Paying fees.
Consider Other Options

While a housing loan might seem like a good way to pay off credit card debt, this strategy involves significant costs and risks. Homeowners should consider other options, such as the avalanche or snowball repayment methods, balance transfer cards, or personal loans, before risking their home to pay off credit card debt.