Have you ever considered taking out a home equity loan (also known as a HELOC) 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're trying to pay off your debt.
But I think consolidating your debt into a home equity loan is an extremely bad move, and I'll tell you why below.
Why Some People Recommend Home Equity Loans
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 and lower your interest rate, that's a great thing, right?
Right.
Why Do You Need a Home Equity Loan
However, if you're thinking about rolling your debt into a home equity loan, you need to figure out WHY you feel you need to do this in the first place.
So you should ask yourself a couple of quick 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 these questions about home equity loans:
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 behavior of the person (or people) that took out the debt in the first place. A home equity loan will not fix your money problems.
Your behavior and attitude when it comes to debt have to change.
Paying off your credit cards and other debt with a HELOC 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.
Consequences of a Home Equity Loan
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 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 HELOC 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.
Quick fixes don't work.
Behavior change is the only fix that can work permanently without putting you at great risk.
You can start by checking out my Celebrating Financial Freedom online course that shows you how.
If you're interested, you can sign up to receive my free email mini-course that will give you a taste of what it's all about.
Question: Have you ever used a home equity loan to pay off other debts? What was your experience?
Let me know in the comments.
Resources:
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
Multiple Streams of Income- What is it and Why Do You Need it?
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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.
I really don’t think a home equity loan is a good idea whether you change spending habits or not.
How about cashing out one’s equity and using that money to pay off the debt?