Some may argue that the easiest way to put your home in jeopardy is to try to consolidate credit card debt by taking a home equity loan to pay off your credit card debt. While financial institutions will advertise the advantages of paying off high interest credit card debt with a home equity loan they may not inform you of all of the ramifications of using your home as collateral. They will also advise you that there may be a tax advantage to this type of loan and that paying off the credit card debt will improve your credit score but it is a good idea to consult a tax advisor about these issues when considering a home equity loan. Although your credit score will improve if you pay off your credit card debt, it is not necessarily a sufficient reason to take the risk.
It is not always a good idea to tie your debt in with your home. It may get you thought the immediate financial need but if you run into problems down the road you will be wise to have the security of your home intact. If job security is an issue, and you do not reserves saved in the bank, you may want to hold off on using your home equity.
Advertisements call these loans, debt consolidation loans. Usually these loans are offered at introductory adjustable rates which are significantly lower than average credit card rates. The adjustable rate loan, after six months or a year, usually increases. It is tied into an index (Treasury rate of Prime Rate) plus 1 or 2 percent interest. It is important to remember that second mortgages and home equity loans tied into adjustable interest rates are a primary cause of bankruptcy today.
Although the lower monthly payments may initially appear to give you more savings, you may end up paying more in the long-term. In an inflationary period, the monthly payments can increase dramatically and the need to borrow additional funds will also increase leading to additional credit card debt until bankruptcy is the only solution.
Refinancing with a fixed interest rate equity loan may be somewhat more costly initially because of closing costs etc., nevertheless refinance of the first mortgage at a fixed rate of interest or a second mortgage at a fixed rate of interest may be a better way to go for those who do not want to put their home in jeopardy in an effort to consolidate their debts.