The Risk of Using an Equity Loan to Pay Off Credit Card Debt

When your home has increased in value, as so many homes have over the last few years, you may be tempted to borrow against your equity to pay off high-interest credit card debt. While this strategy may seem appealing at first glance, the risk of an equity loan can undermine your financial stability and your residential security.

On the pro-side, home equity loans typically have lower interest rates compared to credit card debt. If you take a home equity loan to pay off your credit card debt, you will end up with a smaller monthly payment. On the con-side, you will have converted unsecured debit into secured debt backed by collateral — in this case, your home.

Secured debt, like an equity loan, puts an enforceable lien against your home while unsecured debt, like a credit card, is not enforceable by seizure of any specific asset. Defaulting on credit card debt can damage your credit score, can lead to aggressive collection practices, and can result in a court judgment against you. But with unsecured debt, your home is insulated from the creditor.

In Texas, the entire value of the homestead is exempt from unsecured debt claims. Even a judgment in court favoring the unsecured creditor does not put your home at risk. But if you convert unsecured credit card debt into secured home equity debt you do put your home at risk. There is no homestead exemption for secured debt. Swapping secured debt for unsecured debt puts you at risk of losing your home if you default.

In Washington state the protection is not as extensive. Your home value is exempt from unsecured creditor claims up to the median home value in your county. Defaulting on unsecured credit card debt can lead to losing your home, but you keep your equity up to the county’s median value. Swapping secured debt for unsecured debt removes this exemption, risking the entire home value if you default. In 2025, the exemption is $540,000 in Thurston County and about $846,000 in King County.

In both states, swapping secured home equity debt for unsecured credit card debt exposes you to:

• Foreclosure Risk. A loan secured by your home places your property at risk. In the event you default on your loan, you are risking loss of your home.

• Debt that Impacts your Heirs. If you die, credit card companies rarely sue to recover from your estate (although the debt is owed, unsecured debt may go uncollected). But if the debt is secured by your home, the debt must be paid in full via the sale of the house or by the person who inherits the house to avoid foreclosure.

Before opting for a home equity loan to pay off credit card debt, consider alternatives such as debt counseling, budget assistance, or negotiating with credit card companies for lower interest rates. Assessing your financial situation holistically and seeking professional advice can help you make informed decisions and avoid jeopardizing your most valuable asset—your home.

In conclusion, while leveraging home equity to pay off credit card debt may seem advantageous due to lower interest rates, the inherent risks and potential for severe consequences make it a strategy to approach with caution.

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Paul Premack is a Certified Elder Law Attorney for 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