The Pros and Cons to Using Equity to Pay Off Debt

Advantage of Using Equity to Pay Off Debt

Your home is one of the most significant assets you may own during your lifetime. For this reason, many savvy borrowers understand that leveraging this long-term investment can come with a ton of upside.

Get a Better Interest Rate

One of the best reasons to use your available equity to pay off debt is to save money in interest over time by securing a better interest rate. Mortgage interest rates tend to have more favorable rates than other types of loans, and currently, rates are sitting at all-time lows.

Personal loans and credit cards often carry higher interest rates because they are unsecured, which increases the risk creditors incur.

Conversely, standard mortgages and home equity loans are collateralized by your home. If you ever end up defaulting on the debt, your lender has some recourse by foreclosing and selling your home to offset the loss.

Consolidate Payments

Another advantage of using your home's equity to pay off debt is to help consolidate your monthly payments into one single payment. Doing this can make it easier to manage your monthly budget. You may even free up cash flow allowing you to allocate more money into savings, toward retirement, or other purposes.

Lower Out-of-Pocket Costs

Unlike other debt consolidation loans, home equity loans and lines of credit often cost little or nothing to obtain. As a result, it should be easy to find lenders that require no upfront application fee or charge expensive origination fees. You won't even need to bring any cash to close in almost all cases.

Disadvantages to Using Equity to Pay Off Debt

While there are great reasons to consider using your home's equity to pay off debt, it's also important to understand the potential downsides of leveraging your home. So whether you're using a home equity loan or a cash-out refinance, consider these factors before committing to any new credit.

Greater Risk of Foreclosure

Over leveraging your home can put you at a greater risk of foreclosure for a few reasons. The first reason is that if market conditions change unexpectedly and home prices start to decline in your area, you could end up owing more than what your home is worth.

Another reason foreclosure could be more likely if you take out a new mortgage with a greater monthly payment. Should something unexpected impact your income, the greater monthly payment would deplete any reserves assets you might have faster.

Feeds Bad Spending Habits

Using equity to pay off debt can have both short and long-term benefits, but it can put you in a weak financial position if you end up going out and racking up new debt. Ultimately, consolidating debt cannot correct bad spending habits. If anything, it can lull you into a false sense of security.

Some of our industry leaders can help you understand and feel confident about your decision whether to tap your equity to pay off debt or not. Consolidating your debt is a great option, so long as you can afford it, and often when we do a cash-out refi for our customers, they manage to pay off their debt and get a significantly lower rate, so their payment doesn't go up.