Credit card is so convenient we often treat it as cash. With a few cards on hand, we soon run up a huge credit balance before we even realize it. Unfortunately, credit card is no cash. It is a debt that we must pay back. So we start to panic and scramble for ways to refinance credit card debt.
If you own a property, an option is to take up a home equity loan. You can then use the loan money to pay off the credit card debt fully. Before you rush out to get it though, it is wise to look at the pros and cons of refinancing the debt with a home equity loan.
On the plus side, you can save a fair bit of money when you refinance credit card debt with equity loan. Firstly, the interest rate of equity loan is usually much lower than that of a credit card. So the monthly interest payment should be lesser. Secondly, the interest you pay on home loan has the advantage of being tax deductible. Credit card interest does not give you this benefit.
Next, home equity loan is easier to manage administrative wise. Instead of confusing yourself with a few credit card statements and due dates, you only need to worry about one monthly payment. Home loan payments are on a fixed schedule too. There are only so many numbers of payments you need to make, so you know exactly when you will pay off the loan.
The biggest risk with using a home equity loan to refinance credit card debt, on the other hand, is losing your property. When economic downturn, job loss, or other circumstances forces you to default on loan payments, the loan company may possess the home you are living in. Also, if you do not learn to live within your means, you will be tempted to use the credit cards again with the balances cleared off. This can easily turn into a vicious cycle.
You need to do your math to see whether a home equity loan really saves you money after all. There are closing costs, appraisal and other fees associated with the loan. Maybe the interest savings cannot cover these fees? Furthermore, home equity loans normally take 10-20 years to repay. So even at a lower rate, the interests over the years may turn out to be a much more expensive option in the end.
It is your choice whether a home equity loan is right for you to refinance credit card debt. The important thing is to weigh the pros and cons carefully before you decide. If you feel this is what you want after due consideration, make sure you follow the loan repayment schedule strictly. Do it right and you will be rewarded with a healthy finance again.
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