Devoted to interest rates, loans, and lending institutions

A couple of days ago, I wrote about how it is now possible to tap your home equity with a debit card. On the flip side, one of the debt consolidation practices that has been in vogue lately is the home equity loan used to pay off credit cards. And, even with mortgage lenders tightening things up a little bit, I have seen -- on TV and the Internet -- and heard -- on the radio -- ads for using home equity to pay off credit cards.

How you can use home equity as debt consolidation

Basically, what you do is get a "cash out" refinance. You refinance your home for the total of its value (which is usually more than you owe) and you get cash for the difference between what you refinance and what you still owe on your home mortgage. Then you use the cash from your home equity to pay off your credit cards.

Advantages to debt consolidation with home equity

One of the main advantages cited in terms of using home equity to pay off credit cards is the lower interest rate. A home equity loan will offer a much lower rate (and this usually translates to lower overall payments). Additionally, the interest on your home equity loan is tax deductible, unlike the interest on your credit cards. For some people, this simplifies the process.

Disadvantages to using your home equity to pay off credit cards

On the other hand, this can be a very bad idea. Consider: Your home equity loan is secured by your home. Credit cards are secured by nothing. If something changes, and you can't make credit card payments, there isn't anything that can be done immediately. If you can't make payments on your home equity loan, your home can be repossessed. Do you want to exchange your unsecured debt for the possibility that you could lose your home?

And, as pointed out on the Blueprint for Financial Prosperity, using home equity to pay off your credit cards doesn't address the root problem: your spending habits. If you don't reform the way you use money, chances are you'll end up in even more debt. Many people find themselves saddled with a second mortgage, and then many people start charging again on their newly-free credit cards.