Home equity loans to pay off credit cards
Another alternative, if you’re really in credit card trouble, is to rake out a home equity loan to pay off your debt. A home equity loan has its advantages. The loan will almost certainly be at a lower interest rate than your credit card, and often that interest is tax-deductible, so you’ll have converted a high- interest, non-tax-deductible debt to one that has lower interest and is tax-deductible.
The amount of money that you can take out of your home with this kind of loan is based on a percentage of the equity that you have in your home. Equity is the difference between what your house is worth and how much you owe on your mortgage. In other words, if your house is worth $200,000 and you have mortgage of $150,000, it means that you have about $50,000 equity in your home.
Can you then take out a $50,000 home equity loan? No, most banks will let you borrow a total of only 80 percent of the value of your house, including all current mortgages. If your house is worth $200,000, 80 percent of its value is $160,000. Subtract the $150,000 you owe on the first mortgage, and this gives you the amount you can get on a home equity loan if you qualify: in this case, $10,000.