Taking out a home equity loan to pay off your credit card debt is a common strategy for Canadians. When it comes to paying off credit card debt, compounding interest rates can make repayment feel like an uphill battle.

If you are a Canadian homeowner looking to get out from under your credit card debt, you may be eligible to use a home equity loan to pay off your balance.

Is a home equity loan the right choice for you? In this guide, we cover the basics of paying off debt with a home equity loan as well as the associated benefits and risks.

What is a Home Equity Loan?

A home equity loan is a type of loan that allows people to borrow money against the equity they currently hold in their homes. Equity refers to the portion of your home you have paid off and fully own. It is the difference between the price of your house and the amount you still owe on your mortgage.

When you take a home equity loan, the bank or credit union will use a percentage of your equity to give you a loan. Homeowners with large amounts of credit card debt sometimes use home equity loans to pay off their debt and then repay the amount they borrowed from the bank.

Home Equity Loan VS HELOC.

There are two ways to access the equity in your home: home equity loans and home equity lines of credit (HELOC). However, the two are certainly not the same.

A home equity line of credit (HELOC), like other forms of credit, provides you with access to funds based on the equity in your home. You can borrow, spend and repay the money tied to a HELOC the same way you might use a credit card. A HELOC will usually have a limit determined as a percentage of your current equity. This percentage can vary based on your credit score and financial profile.

A home equity loan is a lump sum of money borrowed against the value of a house. In many cases, it’s a better choice than a HELOC for significant debt consolidation and repayment.

Benefits and Risks of Home Equity Loan

A home equity loan can be a good option for consumers who are struggling to repay their credit card debt. Here are some of the advantages:

Lower Interest Rate – Home equity loans typically come with lower interest rates than credit cards, which can save you thousands of dollars over the life of a loan.

Debt Consolidation – A home equity loan allows you to combine multiple credit card payments into one monthly payment, saving you money on interest and simplifying your debt repayment process.

Before considering a home equity loan, you should understand the risks involved. Potential drawbacks include:

Your Home as Collateral – A home equity loan is a type of financial aid that uses your home as collateral. If you default on your payments, your lender can foreclose on your house. However, as long as you approach the loan realistically, budget for the repayment of principal, and manage your payments in a timely manner, the chances of foreclosure are low.

You May Accumulate More Debt – Home equity loans can be a great way to pay off credit card debt, but it is important to consider your current financial situation. If you are not confident that you can repay your home equity loan, you may find yourself in more debt than before.

Other Ways to Reduce Your Credit Card Debt

If home equity loans aren’t the best solution for your needs, there are other alternatives to consider.

• Switch to a Lower-Interest Credit Card – One of the biggest challenges when paying off credit card debt is the increasing cost of compounded interest, which can quickly spiral out of control when a balance goes unpaid. Many credit card companies offer promotions for new clients that reduce interest expenses. One of these promotions is 0% interest for the first year or two. While transferring your debt to a new card will not make it disappear, it does give you more time to catch up on your payments without having to pay substantial interest fees.
• Create a Repayment Plan – The sooner you repay your credit card debt, the less money you’ll have to pay in interest. The smaller your outstanding balance, the lower your interest rate will be. Budgeting out your earnings to pay off as much of your credit card bill as you can, as quickly as you can, will save you a lot of money over time.

Ask the Experts

Orchid Financing can help you explore your options for debt consolidation loans. We have access to a vast network of over 50 lenders and have extensive experience in this field. Our team will work with you to determine if a home equity loan is right for you.

Contact Us to schedule a free consultation today!