Debt Relief Option #2: Home Equity Loans

Using a home equity loan as a debt relief option basically means taking out a second, or line of credit, secured by the equity in your home, and using it to pay off "high interest" debt.

Benefits of Home Equity Loans

Prior to the real estate meltdown, home equity loans were shockingly easy to obtain, and were used by hundreds of thousands of consumers to pay down credit card debt. However, the dramatic downturn in home values has eaten away billions of dollars of home equity, while lenders have simultaneously, and dramatically, tightened their qualification requirements. The combination of these two issues has made this debt relief option much less viable for most people.

Paying off credit cards with a home equity loan can also sometimes improve your credit score.

Risks of Home Equity Loans

Too often, consumers accumulate piles of credit card debt, use equity from their home to pay off that debt, and then accumulate credit card debt again. This cycle is a key indicator that something else is going on. Sometimes it's due to poor budgeting or lack of discipline regarding making purchases on credit. However, many times, the cycle is due to poor debt-to-income. This simply means many people do not have enough income coming in to cover all of their essential life needs, and are using credit cards to fill the gap.

The risk with home equity loans is if you do fall into that cycle, or any other financial hardship, and are unable to make payments on the loan, your home can be foreclosed by the lender, because these types of loans are "secured" by your home.

An important point to understand is that credit card debt is an "unsecured" loan, which means it is not secured by any of your assets, and you could not lose your home if you were unable to make your payments. However, if you were to pay off your unsecured credit card debt with a secured home equity loan, and then could not afford to make the payments, your house would be at risk.

Downsides of Home Equity Loans

Aside from the risks, there are not any obvious downsides to home equity loans as a debt relief option. Again, if you have equity in your home, and are in a strong financial position, this can be a good option to consider.

However, for consumers that either don't have equity in a home, or, are not in a strong financial position, it may prove to be difficult to qualify for a home equity loan.