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Why a Home Equity Loan is a Terrible Idea for Paying Off Debt

home equity pay off debt

Have you ever considered taking out a home equity loan to consolidate your debt?

There are a lot of people out there giving personal finance advice that will advise you to do that when you have a lot of debt and you’re trying to get it paid down or paid off.

But I think consolidating your debt into a home equity loan is a very bad move, and I’ll tell you why in a minute.

First, I’ll let you in on why some “financial gurus” recommend consolidating debt into a home equity loan in the first place.

 

There are two main reasons:

  • It’s “easier”-  The thinking is that you use the loan money to pay off all of your outstanding consumer debt.  Then you only have one loan payment (the home equity loan) to deal with every month.  It makes things easier and less confusing than paying multiple loans every month.
  • To Get a Lower Interest Rate- You can use a lower interest home equity loan to pay off higher interest consumer debt, which will save you money on interest over time.

Of course, these sound like good reasons, and on the surface, maybe they are.  Whenever you can reduce stress and confusion along with lowering your interest rate, that’s a great thing, right?

Right.

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Using a home equity loan to pay off debt. Smart or Stupid? Find out here

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Why Do You Need a Home Equity Loan?

However, if you’re thinking about rolling all of your debt into a home equity loan, you need to figure out WHY you feel you need to do this in the first place.

You should be asking yourself a couple of questions:

  • Am I doing this to lower my payments because my debt is eating me alive?
  • Have I considered the potential future consequences of using a home equity loan to consolidate my debt?

 

Here’s how I would answer those questions:

  • If you have dug yourself a massive hole of debt, a home equity loan is not going to save you.  All it does is move your debt from one place to another.  Usually it’s not the debt that’s the actual problem, it’s the person (or people) that took out the debt in the first place.

Your behavior and attitude when it comes to debt have to change.

Paying off your credit cards and other debt with a home equity loan does not change the behavior that got you into debt in the first place.  The result is that most people don’t change their habits and go right back to the credit cards, ending up in a much worse situation than what they started with.

I know, I know, you’re not most people.

Except you are.

  • You also have to realize that there is a potentially dire consequence to paying off consumer debt with a home equity loan, and it is this:  You are putting your house in jeopardy if you can’t pay off the loan.

Credit card debt, medical debt, and some consumer loans can be reduced or written off by the company if you just can’t pay it.  That may ding your credit score for awhile (big woop, you don’t need a credit score anyway), but it’s better than having your house taken away from you.

Credit cards and medical debt are unsecured debt, which means they can’t seize any of your property if you can’t pay.  Even with a vehicle loan, all they can legally take is the vehicle.  Do you really want to put your home at risk if you run into problems and can’t pay?

Don’t put yourself in that vulnerable position.

Don’t end up broke and homeless.

So if you’re thinking about taking out a home equity loan to pay off your consumer debt, let me be clear if I haven’t already-

DON’T DO IT!!!

There is a better way.

 

A Home Equity Loan Won’t Change Bad Habits

Learn to change your habits when it comes to credit cards and debt.  Make a written plan to pay off your debt that doesn’t involve putting your house on the line.

home equity pay off debtQuick fixes don’t work.

Behavior change is the only fix that can work permanently without putting you at great risk.

You can start by taking a look at my Celebrating Financial Freedom course that shows you exactly how to do that.  I’ll be releasing the course in an online format soon.

If you’re interested, you can sign up to receive updates on its progress and be the first to find out when the course launches (no spam and I don’t share your email address).  I probably will even extend a special offer only to those on this exclusive list.  So if you’re even remotely interested in how to get out of debt using solid Christian and common sense principles, sign up and I’ll keep you informed.

Have you ever used a home equity loan to pay off other debts?  What was your experience?

Let me know in the comments.

 

Resources:

How to Lower Interest Rates on Your Credit Cards With Just One Call

You Know What You Should Be Doing, What’s Holding You Back?

Eliminate Debt Forever by Telling Yourself a Different Story

How to Pay Off a Mountain of Medical Debt

4 Steps to Get Rid of Car Payments Forever

How Do You Get Out of Debt (Part 4)- The Debt Rocket

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Ready to Get Serious About Getting Out of Debt?

Celebrating Financial Freedom Online Get Out of Debt CourseIf you’re seriously considering changing your financial life by getting out of debt, then you have to check out my free mini-course that will get you started on the right track.  It’s a shorter email version of my popular online get out of debt course.

In this 6 day mini-course, I’ll reveal the steps that my wife and I took to get out of debt, and even eliminate our money fights for good!  Best of all, it’s absolutely free!




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{ 2 comments… add one }

  • Catherine , 6:55 am

    Like you said it won’t change behaviour so its only a good idea if you’re willing to make necessary changes as well and treat it as any other debt in terms of payoff. You should still commit to paying the debt off as fast as possible and if you were able to get a lower interest rate, is hopefully faster than current rate (assuming high unsecured interest rate being consolidated). Really depends on person and willingness to change/not fall back into bad habits.

    • Dr. Jason Cabler , 7:36 am

      I really don’t think a home equity loan is a good idea whether you change spending habits or not.

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