Why You Should Never Use a Home Equity Loan to Pay Off Debt

Have you ever thought about taking out a home equity loan to help pay off debt?

There are a lot of financial gurus that will advise you to dip into your home’s equity when you have a pile of debt you need to get paid off.

But I believe paying off your debt with a home equity loan is not a wise move, and I’ll tell you why in just a minute.


Why Some Gurus Recommend Home Equity Loans For Paying Off Debt

But first, I want to cover why some “financial gurus” say you should consolidate your debt into a home equity loan in the first place.

There are a couple of reasons they typically use:

  • You Can Get a Lower Interest Rate–  If you use a low interest home equity loan to pay off high interest consumer debt, it can save you money on interest over time.
  • It’s “Easier” To Pay Off The Debt–  The logic is that you use the money from the home equity loan to pay off all of your consumer debt.  Then, instead of multiple payments to multiple creditors, you only have one loan payment (the home equity loan) to deal with every month.  It makes managing debt payments easier than paying multiple loans every month.

On the surface, these might sound like pretty good reasons to take out a home equity loan.  I mean seriously, whenever you can lower your interest ratealong with reducing the stress and confusion of multiple debt payments, that’s a great thing, right?

Maybe not.


Ask Yourself The Right Questions

If you’re seriously considering paying off debt with a home equity loan, it’s a good idea to figure out WHY you feel you need to do this in the first place.

You should ask yourself a couple of questions first:

  • Have I really thought about the potential consequences of using a home equity loan to pay off my debt?  They could be very serious.
  • Am I doing this because I want to lower my payments and get a little breathing room financially?

Here how I usually address those questions:

  • If you’re dealing with a huge pile of debt, a home equity loan is not a magic bullet that’s going to save you from your situation.  All it really accomplishes is to transfer your debt from one place to another.  In most cases, it’s not the debt that’s the problem, it’s the person (or people) that incurred the debt.  Changing the location of the debt doesn’t do a lot to solve the problem.


There Has To Be a Change Of Behavior

The biggest change has to happen with the behavior and attitude of the people that took out the debt in the first place.

Paying off your credit cards and other consumer debt with a home equity loan does absolutely nothing to change the behavior that gets you into debt in the first place.  The result is that most people don’t take any action to change habits.  Then, after a period of time, they go right back to the credit cards.  Because of that, they end up in a much worse financial situation than what they started with.

I get it, you’re not like most people.

Except you probably are.

Unless you are totally committed to changing behaviors and attitudes when it comes to being in debt, you’ll eventually end up in worse situation.  I’ve seen it happen time after time.  In fact, it’s one of the bigger contributing factors as to why so many people lost their houses over the last few years.


You Could Lose Your House

This is because there is a potentially very bad consequence of paying off consumer debt with a home equity loan.  If you can’t pay off the loan, you could end up losing your house because of it.

Medical debt, Credit card debt, and most consumer debt can be renegotiated or written off by the company if you just can’t pay it for some reason.  Of course, that might hurt your credit score for awhile (big deal, you don’t need a credit score anyway), but it’s definitely a lot better than losing your house.


There Is a Better Way to Pay Off Debt

One of the few good things about credit cards and most other consumer debt is that it is unsecured debt.  That means they can’t take 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 risk losing your home if, for some reason, you can’t pay the debt?

Don’t put yourself in that position.

Don’t end up broke and homeless.

So if you’re seriously considering using a home equity loan to pay off your consumer debt, I want to be 100% clear on the matter-


There is a better way.


Paying Off Debt Means Changing Habits

One of the best things you can do financially is to learn to change your habits when it comes to debt and credit cards.  That starts with making a written plan to pay off your debt that doesn’t involve putting your house at risk.

Quick fixes just don’t work.

Changing behavior is the best fix that can work permanently without creating greater financial risk.

If you’re interested in learning how to make a rock solid, step by step plan to pay off your debt without putting finances at a greater risk, you might want to check out my Celebrating Financial Freedom online course.  It’ll show you everything you need to know.

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

Leave a comment and let me know.



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About Dr. Jason Cabler

6 Responses to “Why You Should Never Use a Home Equity Loan to Pay Off Debt”

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  1. I agree 100%, you make excellent points. Many people who “consolidate” credit card debt into a home equity loan find themselves a few years later with most of the home equity loan outstanding AND maxed credit cards again! For most people most of the time, any sort of consolidation is not a debt solution but just postponing a real solution. Also, as you point out, we should be very cautious about converting unsecured debt to secured debt. At least if credit card debt cannot be paid your house isn’t in jeopardy!

    • You got it, In general, consolidating debt doesn’t allow for behavior change to happen, it just postpones the problem till a later date. If you consolidate, you better be cutting up the credit cards and doing a monthly budget too, or you’ll be right back where you started.

      Of course, it’s never wise to unsecured debt for secured debt. It just increases your risk for something really bad happening!

  2. Michelle says:

    I think this is very true for all kinds of debt. It is just another form of debt that does not ever get smaller unless you would be willing to understand where the debt is coming from. Great post!

  3. Jason, very good points (all of them). I find the one about the value of paying off debt for good habits creation and leaning particularly to the point. We learned so much by paying off our debt step by step and we still keep the habits we developed going. As a result we are building ‘capital’ very fast.

  4. Developing good habits is the key to getting out of debt and staying out. When you can do that, then your savings start to build and multiply, as you’ve seen in your own situation. Great job Maria, keep it up!

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