Homeowners with substantial debt have the ability to use their home’s equity to repay their debt. Home equity loans can be beneficial, but there are serious risks involved. If you have considered using a home equity loan to pay off your unsecured debts - such as credit card debt - or to get cash, then you should understand the potential danger.

Credit card debt can become an overwhelming burden on your finances and personal life. Some homeowners seek to eliminate their credit card debt by obtaining a second mortgage. The benefit of a home equity loan is to pay off high interest debt at a lower interest rate. Your home-loan interest rate, normally, is significantly lower than your credit card interest rate because your home loan is a secured debt.

However, there are potential hazards with home equity loans. If you are unable to make payments on the second mortgage, then the lender can foreclose on your home. Another pitfall with a home equity loan is if your home depreciates in value, you will be upside-down in your loan—meaning you will owe more on your home than what it is worth. Due to the recent housing market troubles, many homes have depreciated in value and, subsequently, many homeowners with home equity loans owe more than the resell value of their home.

Another substantial downfall to a home equity loan is the potential for you to accrue more debt. Unless you change the behavior that caused the debt in the first place, you will likely begin purchasing items you cannot afford and repeat the cycle of debt, which can lead to bankruptcy. Every time you refinance your loan, fees and closing costs are, usually, rolled into the loan. This means that you are drastically increasing your debt every time you refinance and taking one more step towards foreclosure or bankruptcy.

Before you obtain a home equity loan, carefully weigh the benefits and potential risks. If you decide to refinance your home, be sure to do so with a trusted lending institution. There are plenty of predatory lenders searching for your business. You need to do your due diligence before signing any refinancing paperwork concerning your home because your house, finances and family depend on it.