The Pros & Cons Of Using Home Equity Loans For Debt Reduction

Home equity loans are a common way of refinancing debt. Because the value of most people's homes has increased considerably over the past several years, they often have quite a bit of equity they can use for debt reduction. While it has many advantages, there are some things that you need to consider before using the equity in your home.

First, an explanation of what a home equity loan really is. It's basically a loan or a line of credit that is secured by the equity you have in your home. For example, if your home is worth $250,000 and you owe $125,000 on your mortgage, your equity is $125,000. You can borrow by using this equity as security.

Probably the most common way to use the equity in your home is through a HELOC - Home Equity Line Of Credit. These credit lines were originally created to finance improvements to the home itself, but over the years they have come to be useful for other things as well, such as refinancing high interest debt such as credit cards.

The interest on most loans is not tax deductible, but interest paid on a home loan is. Because of this, there can be tax advantages that make this a cheaper type of debt than many others.

HELOCs are normally set up as a line of credit that can be drawn upon as you need it - much like a credit card. You do not receive a lump sum payment for the full amount when the loan is established. This lets you borrow only what you need, keeping your interest as low as possible.

It's important to remember, however, that a home equity loan is still a loan. You're still borrowing money and paying interest on what you use. If debt reduction is one of the reasons for getting a home equity loan, you need to ask yourself whether a lack of willpower over your spending contributed to the debt in the first place.

If so, having a line of credit at your disposal may create even more temptation to spend, making the problem worse rather than better.