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Taking out a home equity loan to pay off credit cards

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I have significant credit card debt that I would like to pay off with my home equity. My current FICO is 640. I don't have any negatives on my reports, just high credit utilization. I already have one equity loan with Penfed. Would it be best to take out a home equity loan, or to refinance my first two mortgages, and just have one mortgage if that's even possible with my current scores?

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Posted (edited)

Generally speaking it's not a good idea to convert unsecured debt into secured, because it makes your current situation even riskier in case you become unable to pay.  

 

An equity loan/equity line has much lower upfront costs than a first mortgage (refinancing your current two secured loans into one and taking cash out), but you will generally have a higher interest rate on an equity product.  You'll have to do some math to see which is more favorable financially if you plan to move forward.

 

Assume that you'll have to close your current second before you'll be able to get another.  

 

How long will it take you to just pay back the credit card balances with recurring income?

 

Edited by cv91915

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It will take me two to three years to pay off my credit cards putting everything extra towards them. However, that would leave me with nothing to reinvest in growing my business, and would cost me a lot of interest. I could pay it off in half that time with a lower interest rate, and save thousands in interest.  I was thinking about taking out an equity loan now, and once my credit score goes back up I could hopefully reduce the rate on my first mortgage by a point.

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13 hours ago, IG88 said:

It will take me two to three years to pay off my credit cards putting everything extra towards them. However, that would leave me with nothing to reinvest in growing my business, and would cost me a lot of interest. I could pay it off in half that time with a lower interest rate, and save thousands in interest.  I was thinking about taking out an equity loan now, and once my credit score goes back up I could hopefully reduce the rate on my first mortgage by a point.

 

What you are describing now is financing a business with home equity, rather than paying credit card balances with home equity.  If your business is on a growth trajectory, why not incorporate and finance your business with business credit?

 

If you shift your current debt to a home equity product, what happens if your growing business stops growing?  For most people similarly situated, credit card balances will climb back up to where they were, while the equity loan balance is still sitting there.  

 

As an alternative:  you probably wouldn't have to pay your balances down too far (as a percentage) before you could start opening up some 0% or low APR cards and do balance transfers, which would keep the debt unsecured while also saving you money on interest.

 

With approximate numbers (we don't know if you're talking about $5k or 500k in credit card debt) you may get some more targeted advice.

 

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Is your income stream solely tied to your business?  How stable is that income stream?  Unless you have enough stable income to safely afford the mortgages/heloc I would not be converting unsecured debt to secured as CV points out.

 

If you do have a stable income source (either the business is a side gig or from another source like a spouse), then I would reach out to a trusted mortgage broker to understand your options and what you would really be saving.  While you might lower the rates, if you have to pay a few thousand in closing costs that may totally wipe out the savings.  You can also compare that to what PenFed and other CUs can offer.  While I wouldn't recommend going with a CU to obtain a first on a home purchase (they can be notoriously slow and obtuse), you aren't on a time crunch doing a re-fi and can afford to deal with their idiosyncrasies. 

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On 10/3/2019 at 8:15 AM, cv91915 said:

 

What you are describing now is financing a business with home equity, rather than paying credit card balances with home equity.  If your business is on a growth trajectory, why not incorporate and finance your business with business credit?

 

If you shift your current debt to a home equity product, what happens if your growing business stops growing?  For most people similarly situated, credit card balances will climb back up to where they were, while the equity loan balance is still sitting there.  

 

As an alternative:  you probably wouldn't have to pay your balances down too far (as a percentage) before you could start opening up some 0% or low APR cards and do balance transfers, which would keep the debt unsecured while also saving you money on interest.

 

With approximate numbers (we don't know if you're talking about $5k or 500k in credit card debt) you may get some more targeted advice.

 

 

On 10/3/2019 at 9:56 AM, CTSoxFan said:

Is your income stream solely tied to your business?  How stable is that income stream?  Unless you have enough stable income to safely afford the mortgages/heloc I would not be converting unsecured debt to secured as CV points out.

 

If you do have a stable income source (either the business is a side gig or from another source like a spouse), then I would reach out to a trusted mortgage broker to understand your options and what you would really be saving.  While you might lower the rates, if you have to pay a few thousand in closing costs that may totally wipe out the savings.  You can also compare that to what PenFed and other CUs can offer.  While I wouldn't recommend going with a CU to obtain a first on a home purchase (they can be notoriously slow and obtuse), you aren't on a time crunch doing a re-fi and can afford to deal with their idiosyncrasies. 

I owe about 70k in credit card debt. My income is about 60% from steady employment(recession proof), and 40% from my business. I can easily pay the mortgages on just my employment income.

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