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As a homeowner, there’s added financial responsibility on your hands, including the mortgage, property taxes, home maintenance and other expenses. There’s a possibility you’re also shouldering high-interest debt such as credit cards. Fortunately, there are ways to pay down your debt down faster with the help of your home. A home equity loan allows you to use the equity in your property to consolidate debt at a lower interest rate. However, this strategy does come with some drawbacks. Here’s what you should know. How a Home Equity Loan Consolidates DebtHome equity is the difference between what you owe on your home (the mortgage balance) and how much it’s currently worth, typically based on the current appraised value. You cannot get a home equity loan unless you have some equity in your home; lenders typically look for at least 15% equity in order to essentially lend that back to you. The more you pay to your lender, the higher your equity grows. Another way equity grows is when the overall housing market is healthy and home values (or sales prices) in your area are rising. A home equity loan allows you to borrow against that equity in the form of a lump-sum installment loan. That cash can be used for a variety of purposes, such as making upgrades to your home, paying for college, covering emergency expenses and consolidating debt. Home equity loans are a good tool for debt consolidation because the interest rates are quite low compared to other forms of debt. Once your home equity loan closes and you receive your funds, you can use the money to pay off your existing debt, and then make a single payment to your lender until the loan is repaid, generally in a span of five to 20 years. Pros and Cons to Using a Home Equity Loan to Consolidate DebtWhen deciding whether or not to use a home equity loan to consolidate debt, there are a few important advantages and disadvantages to consider first. Pros
Cons
Is a Home Equity Loan the Best Way to Consolidate Debt?If you’re in solid financial standing, leveraging your home equity to get rid of high-interest debt faster is a smart move. However, if you don’t plan to stay in your home long, or aren’t confident that your income will be stable throughout the repayment period, you might be better off choosing an alternative method of consolidating debt. Other Debt Consolidation OptionsThere are a couple of ways to consolidate your high-interest debt without risking your property. 1. 0% Balance Transfer CardsTo attract new business or issue cards to existing customers, credit card companies will often offer an introductory 0% APR to customers who roll over their existing credit card balance, usually from a competitor. The introductory period typically lasts 12-18 months, during which that balance doesn’t incur any interest charges. That means your payments go 100% toward paying down the principal balance, allowing you to get rid of that debt faster. Usually, there is a balance transfer fee of 2% to 5% upfront. The key is to pay off your balance before the intro period is over, otherwise you’ll start accruing interest charges again. 2. Take Out a Personal LoanPersonal loans, which are loans you can use to pay for nearly anything up to a predetermined amount, also can help you consolidate debt. Rates are usually lower than credit card rates, at least for borrowers with good credit. There are two types of personal loans: secured and unsecured. Secured loans are backed by collateral, such as a bank account or vehicle. This helps reduce the lender’s risk, resulting in a lower interest rate. Unsecured loans allow you to borrow money without putting up any collateral; the tradeoff is that the rate may be a bit higher, and you may be subject to more strict requirements. 3. Put Together a Debt Management PlanIf you’re struggling to make payments on unsecured debt, such as credit cards or personal loans, you can consider working with a nonprofit credit counseling agency to come up with a debt management plan (DMP). An accredited counselor will take over your payments and negotiate with lenders on your behalf to lower the cost of your debt. You’ll then make your reduced payments directly to the agency and get regular progress reports. Signing up for a DMP may come with a fee. Can you use a line of credit to consolidate debt?Consolidate debt with loans or lines of credit.
Here are just a few ways you can combine and manage your debt: Apply for a debt consolidation loan, and then pay just the single monthly payment on your new loan. Open a line of credit rather than taking out another loan, then repay the line of credit as you use it.
Can I use HELOC to pay off debt?Once you build enough equity, you can leverage it with a home equity loan or HELOC (home equity line of credit), which essentially turns that equity into cash you can use for any purpose—including paying off credit cards and other types of debt.
How do I use my home equity to pay off debt?Home equity loans are a type of second mortgage based on the value of your home beyond what you owe on your primary mortgage. You get a lump sum of money, often with closing costs taken out, which you can then use to pay off your debt or for any other purpose.
How can I consolidate my debt to my house?A home equity loan lets you convert a portion of the equity you've built in your home to cash. It's also an effective way to consolidate debt and eliminate those high-interest credit card and loan balances sooner.
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