If you are looking for a practical method to eliminate your high interest debts such as credit cards and student loans, a home equity line could be the solution you are looking for. Debt consolidation using the equity in your home is a fast and easy way of eliminating high interest debt and saving money. Here is what you need to know about home equity loans.
Many homeowners have seen astonishing appreciation in the value of their homes over the past several years. This appreciation results in the appraised value of your home going up from when you purchased the home. Your equity is the difference between the balance owed on your mortgage and the appraised value of your home. For example, if your home appraised at $150,000 and you owe $50,000 on your mortgage, the equity you have in your home is $100,000.
When you take out a home equity loan you are borrowing against this value in your home. A home equity loan is a 2nd mortgage secured by your home; if you default on this loan the lender can foreclose and sell your home to repay the debt.
Consolidating Debt with Home Equity
Using a home equity loan to consolidate high interest debts can be the first step to becoming debt-free. Consumer debts such as credit cards, student loans, and car loans carry high interest rates and other fees. When you consolidate this debt with a home equity loan you will only have to make one payment each month.
Consolidating debt does not eliminate debt; it simply makes it easier to pay and reduces interest paid on the loan; this allows you to pay off your debts faster.
Advantages and Disadvantages
The advantage of consolidating your high interest debt with a home equity loan is that you can pay off the balances and close the accounts right away. Using home equity can reduce your outgoing cash flow by as much as 40 percent each month. The downside of using a home equity loan is the fact that this loan is secured by your home; falling behind on the payments could have disastrous consequences. To learn more about home equity loans register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”