Using an Equity Loan to Pay Credit Cards

By Valencia Higuera

  • Overview

    Poor money management and horrible spending habits contribute to credit card debt. And although a person can acquire excessive debt within a relatively short period, it can take years to reduce credit card balances. But there are ways to eliminate credit card debt. Homeowners have several options available, and if you have a lot of equity, you can use this to pay off your credit cards. A home equity loan or line of credit won't erase debt, but you'll likely receive a lower interest rate and a fixed term, in which you can become debt-free in 5 to 7 years.
    Using an Equity Loan to Pay Credit Cards
    • Step 1

      Tally your debts. Before you can use your equity to pay off debts, you've got to know what you're dealing with. Grab all your credit card statements and calculate your total debt. Additionally, take a look at the interest rate. Ideally, you want a home equity loan or line of credit with a lower rate. That way, you're able to reduce the balance and achieve your goal of debt-free living.
    • Step 2

      Determine if you're disciplined enough to handle a home equity loan. Using an equity loan to pay off credit cards is a smart move--if you're disciplined. Once you've paid off your credit cards, fight the urge to incur additional debt. Cut the credit cards in half, or keep them locked in a safe.

    • Step 3

      Contact your mortgage company. Apply for a home equity loan with your current mortgage company or pick a new one. Before submitting your application, determine how much you can borrow. The average mortgage lender offers home equity loans up to 70 percent of the available equity. Applicants with an excellent credit history can obtain 100 percent equity loans. However, these loans feature a higher interest rate.
    • Step 4

      Complete the paperwork. To get the best deal on a home equity loan, obtain quotes from at least four lenders. Request a quote from your present lender, then contact a mortgage broker and obtain quotes from three additional lenders. Brokers work with different lenders, and they can help you find the lowest rate on an equity loan.
    • Step 5

      Compare quotes. Once you have the loan quotes, compare the fees, rates and terms. Choose the home equity loan that features the lowest rate. Schedule a closing date and sign the loan documents.
    • Step 6

      Pay off your credit cards. At closing, the home equity loan lender presents you a check. Use the funds to pay off your credit cards.
    • Skill: Moderate
    • Ingredients:
    • Credit report
    • Mortgage lender
    • Tip: Home equity loans are risky. Defaulting on the loan can result in foreclosure.
    • Tip: Borrow only what you need to pay off your credit cards.

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