October 19th, 2018 6:38 PM by Jackie A. Graves, President
If you feel
like you’re drowning in debt, you’re not alone. According to Experian’s State of Credit
report, non-mortgage debt (credit cards, medical bills, car loans
and the like) reached an average of $24,706 per household in 2017. With recent
increases in the interest rate, getting out of debt has become more and more of
debt consolidation can be a big help. And, if you’re a homeowner, taking out a
home equity loan for debt consolidation can be a smart choice.
When you have
enough equity in your home, consolidation loans might be worth considering as
an alternative to personal loans or balance transfer credit cards. Learn more
about how the process works and how to decide if it’s right for you.
benefits of debt consolidation through home equity
A home equity
loan or a home equity line of credit (HELOC) can help you tap into your home equity to
Unlike a home
equity loan, a HELOC is a revolving line of credit rather than a lump sum. That
means you can use the funds over time as you need them. Whether you use a HELOC
or a home loan, consolidation of your debts through home equity borrowing
offers several benefits.
1. You’ll have just one payment
previously had medical debt, credit card debt, a personal loan and a car loan,
you know how confusing it can be to keep track of multiple payment due dates.
By consolidating your debt, you have just one payment, rather than several.
2. You’ll know when your debt will be paid off
credit cards are revolving forms of debt — meaning you can continue using them
and add to your balance — coming up with a payoff date can be tricky. A debt
consolidation loan streamlines the process. When you take out a loan, you have
a set repayment term, such as three to five years. You can circle that date on
your calendar and know that’s when you officially will be debt-free.
3. You can get a much lower interest rate
interest rate on variable-rate credit cards was 17.32 percent in September
2018, according to Bankrate data. By consolidating your debt, you can lock in a
much lower interest rate. For example, you could consolidate your debt with a
home equity loan — the September 2018 average interest rate on these loans is
under 6 percent, according to Bankrate data. That way, more of your monthly
payment goes toward the principal rather than interest charges.
4. You can save money
had $10,000 in credit card debt at 15.54 percent interest. If you made only
your minimum payments, you’d end up paying a total of $14,445. By contrast, say
you consolidated your debt to a five-year home equity loan and qualified for a
5 percent interest rate. By the end of your loan, you’ll have repaid just
$11,323. A HELOC or home loan consolidation could help you save over $3,000.
Bankrate’s Debt Consolidation Calculator to find
out how much you could save.
to consolidate debt with home equity
Taking out a
loan is one of the most common ways to consolidate debt. However, if you own
your own home, consolidation loans offer a new wrinkle: You can tap into your home’s equity to better
manage your debt.
equity is its current value minus what you owe. When it comes to a home equity
loan or HELOC, you can typically borrow up to 80 percent of the equity.
Depending on the lender, you can sometimes borrow up to 85 percent.
loans and HELOCs are secured types of debt, meaning that your home secures the
loan as a form of collateral. That difference can help you get a much lower
interest rate than you’d get with other forms of loans.
If you decide
to pursue a HELOC or home equity loan for debt consolidation, you can apply
with your bank or credit union or an online lender.
the drawbacks of a home equity loan for debt consolidation
a HELOC or a home loan, consolidation of debt through home equity borrowing can
get complicated. Consider the pros and cons before you start making
loans and HELOCs tend to take much more time than personal loans. It’s almost
like a second mortgage on your home, so it takes a lot more paperwork and time
to process before you can access your money. If you need the money right away,
a personal loan might be a better option for you.
element of risk
home equity loans are forms of secured debt that use your home as collateral.
As a result, missing payments or defaulting can have more serious consequences.
You could even lose your home. Move forward with a HELOC or home equity loan
only if you can comfortably afford the payments.
and closing costs
the lender you work with, you could face charges like closing costs and
appraisal fees, all which can add to the cost of your loan. When shopping
around for a lender, make sure you understand the closing costs each company
charges and how it’ll affect how much you borrow.
of tax benefits
you could deduct the interest you paid on a home equity loan or HELOC on your
taxes, regardless of its use. However, the 2018 tax reform bill changed that.
Now, you can deduct only the interest paid on your loan if you use the money to
buy, build or renovate. Using a HELOC or home equity loan to pay off credit
card debt does not qualify for the tax deduction.
to do when borrowing isn’t an option
What if you
don’t own a home or have good enough credit to get a personal loan at an
interest rate you can afford?
serious debt and credit problems may want to consider debt relief programs.
Pros and cons of some various debt relief options include:
Agreeing to a
debt management plan with a credit-counseling agency won’t hurt your credit
score, but it requires that you close all accounts included in the plan. In the
case of credit card debt, that requirement means you would have to part with
The good news
is that you make monthly payments to the agency, which in turn makes payments
to your creditors. If you have debts with multiple credit cards or lenders,
you’ll be saved the hassle of tracking multiple bills and due dates.
upside of a debt settlement plan is agreeing to settle with one or more
creditors for less than what you owe. As the trade-off, however, your credit
score will suffer significantly.
have to pay fees and taxes, a consideration that might make debt management a
less drastic option.
around and stick to your strategy
It’s a smart
idea to shop around with
several different home equity loan lenders to ensure you get
the best rates and terms.
select a HELOC or a home loan, consolidation through home equity borrowing
makes sense only if have a plan in place to pay off the debt as quickly as
possible. You’ll also need to avoid racking up credit card debt in the future.
By coming up
with a strategy, you’ll use your loan or HELOC wisely and set yourself up for a
more secure financial future.
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