EchoBay Expert: What are the pros and cons of using a home equity loan to pay off my credit card debt which totals $8,000 and my car loan which I have $5,600 left to pay off?
Loyal Reader: There are two pros to using your home equity loan to payoff credit card debt and your car. First, you can typically deduct the interest on your income taxes. You should check with your tax advisor as certain rules do apply but most homeowners will be able to deduct the interest.
Second, home equity loans generally have very attractive interest rates. The rates are most likely lower than your current car loan and almost definitely lower than the interest rate on your credit card. Coupled with the tax savings, the rate is even lower.
There are, however, several cons to using your home equity loan for this. First, your credit card debt is unsecured. If you don't pay, the credit card company can't take your home away from you. However, once you roll your credit card debt into your house, your lender can decide to foreclose. This is by far the biggest con to using a home equity loan.
Second, you should look at an amortization schedule for your vehicle. With vehicle loans, you pay the majority of the interest in the first few years. If you are already past this point in your loan, it is unlikely you would save very much by refinancing.
If you have an excellent credit history and have a reserve set aside in case of emergencies, a home equity debt consolidation loan can be a good choice. Just be very aware of the fact that you are putting your home at risk.