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Should I use a home equity loan to pay off credit cards and establish an emergency fund?

Posted by Cheryl Costa July 17, 2008 12:41 PM

JP asks:

I just read your blog post regarding WT who wondered whether to increase a line of credit to pay off credit cards. We are in a similar but different situation. I recently learned that my husband has $40K in credit card debt and that he has used $25K of the home equity line of credit against our vacation home. The interest rates are not bad but they are all either time-limited or variable.

Would it be wise to take a fixed line of credit (at a higher rate) against our vacation home to pay off these debts? Also, would it be a good idea to take out a larger amount in order to set up an emergency fund for the family finances and for the vacation home?

In my opinion, I think you will find it very difficult to obtain a larger loan or line against your vacation home, unless you have a large amount of equity in the property. In my earlier posts, I have talked about homeowners who found their existing home equity lines frozen or cancelled --often with little to no warning. It simply is not a great time to be trying to borrow additional amounts from lenders. Everyone is now extra cautious and vacation homes are viewed as being more risky loans. However, even if credit were plentiful, I really, really hate to see people take out loans against their homes to pay off credit card debt.

I wish I had the magic solution for you but I think the best thing to do is to try to pay down the debt as aggressively and efficiently as you can using current cash flow. Another alternative, one that you might find too drastic, involves selling the vacation home and using the proceeds to pay off all your debt and start with a clean slate. That might be too big a step for you but it should be on your list of possibilities since it could take you years to eliminate the debt using current cash flow. Another alternative would be to start renting your vacation (or rent it more frequently) to increase cash flow, which could be used pay down your debt. You are luckier than most in that you already own a vacation home, so you do have more options. However, I think slow and steady debt repayment may be your best option.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.
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About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.
Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.
Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master’s in business administration from Boston University.
Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.

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