Refinancing vs. a Home Equity Line of Credit: What’s the Difference for Credit Card Debt Relief?

It can be helpful to understand the differences between refinancing and a home equity line of credit (HELOC) when you’re considering tapping into the equity you have in your home to solve a credit problem. 

However, this should seldom be the first thing you try to do to get credit card debt relief. The why of this statement will become apparent as we investigate refinancing vs a home equity line of credit as a credit card debt relief solution. 

What is Refinancing?

Over time, your monthly payments, inflation and increasing property values will drive the worth of your home above what you owe on your mortgage. This is known as having equity in your home. Real property, in a lot of ways, is like a piggy bank. Money you can use accrues as property values increase and you pay your mortgage down.

With a suitable amount of equity in a property, you can take out a new loan against its increased value. The bank will then give you a check for the difference between what your home is worth and the outstanding balance of your previous mortgage. You’ll basically reset your mortgage at the current prevailing interest rates and start over paying off the property again. 

What is a Home Equity Line of Credit?

The basic premise is the same as above, however instead of taking out a new loan for the appreciated value of your home, you’ll just tap into the difference between what you owe on the mortgage and your home’s current value. It’s like a credit card on which the limit is the amount of equity you have in the property. 

The process of qualifying for a home equity line of credit is simpler, as it doesn’t involve writing a new mortgage on the property. On the other hand, your existing monthly payment will still be due, along with payments on the equity into which you tap once you start using it. 

Which is Better for Eradicating Credit Card Debt?

Frankly, neither of these approaches represent the best tool for achieving credit card debt relief. Any time you trade unsecured debt for secured debt you’re taking on the risk of losing your home. Meanwhile, there are many, less volatile solutions.

That said, the home equity line of credit is likely to be the better way to go if you have no other choice. With it, you’ll take whatever money you’d paid toward eradicating your credit card debt and use it to repay the HELOC. You’ll have a shorter term, which means you’ll pay less in interest charges. Moreover, the fees associated with getting a HELOC are less than you’ll encounter with refinancing. 

Better Alternatives

However, you should investigate balance transfer credit cards, credit counseling, debt management and personal loans before you go this route. Any of those can get you a similar result — without the risk of losing your house.  

Another important thing to do is take stock of how you got into this situation in the first place. Credit card debt can get out of hand for many reasons. Sometimes it’s because of unexpected emergencies for which the most ready solution is charging the payment. Other times, it’s because of getting caught up in consumerism and letting it overwhelm your better judgment.

You’ll do good to be honest with yourself and figure it out. This is particularly true in the latter instance. The only way a credit card debt relief solution will benefit you in that case is to also get your spending under control