Q: My husband and I have been discussing our credit card debt and car loan, which total about $30,000. He says we should get...

Q: My husband and I have been discussing our credit card debt and car loan, which total about $30,000. He says we should get a home equity loan to consolidate our debt. We owe about $95,000 on our mortgage and our house is currently worth about $175,000 according to a local real estate broker. What do you think, and should we get a home equity loan or a home equity line of credit? Thanks.

A: Home equity loans can provide debt consolidation at a lower rate than credit card companies usually charge, but there are additional considerations including:

  • Determining that you can afford the home equity loan payment
  • Reviewing other financing needs such as home improvement
  • Ensuring that you won’t incur future credit card debt; this negates the purpose of debt consolidation.

A home equity line of credit (HELOC) works like a credit card, and this may pose a risk if you are inclined to impulsive spending. On the other hand, you borrow only what you need as you need it. Home equity credit lines are good for “pay as you go” expenses such as educational expenses or home improvement projects. Home equity credit lines typically carry adjustable rates; payments are subject to change.

Home equity loans are made for a specific amount of money that is repaid over time at a specific interest rate. If debt consolidation is your only reason for home equity financing, a home equity loan would provide funds needed with fixed payments for a specific repayment term.

A home equity loan can simplify bill-paying and reduce fees and interest you’re paying on credit card debt and consumer loans. Shop and compare home equity loan rates to find your best deal.

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Karen Lawson

Karen Lawson