The Risks of Using Home Equity to Pay Off Credit Card Debt

When your home’s value increases, it can be tempting to borrow against that equity. Many homeowners think about utilizing home equity to pay off high-interest credit card debt. At first, this strategy may appear appealing, but the risk of an equity loan can threaten both your financial health and your home.

Pros and Cons of Home Equity Loans

On the positive side, home equity loans generally offer lower interest rates compared to credit card debt. By taking out a home equity loan to pay off your credit card debt, you may find that your monthly payment becomes smaller. However, there are significant downsides to consider.

When you turn unsecured debt into secured debt backed by collateral—such as your home—you expose yourself to potential risks. Secured debt, like a home equity loan, enables creditors to place an enforceable lien on your property. In contrast, unsecured debts, like credit card debt, do not give creditors the right to seize specific assets. Defaulting on credit card debt can damage your credit score and lead to aggressive collection practices. Additionally, it could result in a court judgment against you. With unsecured debt, your home is protected from creditors.

A Closer Look at Texas

In Texas, the entire value of your homestead is safeguarded from unsecured debt claims. Even if a judgment in court favors an unsecured creditor, your home remains safe. However, if you switch from unsecured credit card debt to secured home equity debt, you risk jeopardizing your home. Unlike unsecured debt, secured debt does not have homestead protections. Converting unsecured debt into secured debt can put your home at risk.

Understanding Washington State Protections

In Washington State, the protections are less comprehensive. Your home value is exempt from unsecured creditor claims up to the median home value in your county. If you default on unsecured credit card debt, there is potential for losing your home. However, you can retain your equity up to your county’s median value. By swapping secured debt for unsecured debt, you eliminate this exemption and put your entire home value at risk if you default. As of 2025, the exemption is $540,000 in Thurston County and about $846,000 in King County.

Risks of Swapping Secured Debt for Unsecured Debt

In both Texas and Washington, turning secured home equity debt into unsecured credit card debt exposes you to several significant risks, including:

• Foreclosure Risk: A loan secured by your home puts your property at risk. If you default, you could lose your house.

• Debt Affecting Your Heirs: Upon death, credit card companies seldom pursue recovery from your estate. While the debt is still owed, unsecured debt may remain uncollected. However, if the debt is secured by your home, it needs to be paid in full through the sale or by the heir to avoid foreclosure.

  
  

Alternatives to Consider

Before deciding on a home equity loan to pay off your credit card debt, consider alternative solutions. You may explore debt counseling, budget assistance, or negotiating with credit card companies for lower interest rates. Taking a comprehensive look at your financial situation and seeking professional advice can nurture informed decisions. It’s essential to protect what is often your most valuable asset—your home.

Evaluating Your Financial Options

Understanding your financial landscape is paramount. With the right planning, there may be more effective ways to handle debt without the risks associated with home equity loans. Collaborating with financial experts can guide you through your options.

Avoiding Common Pitfalls

Many homeowners fall into the trap of thinking a home equity loan is the only solution to financial burdens. It’s crucial to weigh all options and consider the potential implications on your home. A home is not just a place to live; it is often a family’s most significant investment.

In conclusion, while using home equity to pay off credit card debt may appear beneficial due to lower interest rates, the substantial risks and possible severe repercussions call for careful consideration.

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Paul Premack is a Certified Elder Law Attorney specializing in Wills and Trusts, Probate, and Elder Law issues. He is licensed to practice law in Texas and Washington. To contact us, visit www.Premack.com.

Column published on March 31, 2025