How to Use Your Home Equity to Consolidate Debt
There are plenty of benefits to owning a home. For starters, you have full control over your property as an owner compared renting. Owning a home also provides you with a way to invest your money and take advantage of appreciation in value over time.
But as it turns out, owning a home might even provide you with a way to effectively deal with your mounting debt. If you’ve got a certain amount of equity built up in your home, you might be able to access it to consolidate your debt.
Why Consolidate Debt?
If you’ve got a lot of different loan payments to make every month, you know how much of a challenge it can be to manage them all and make sure they’re paid on time. It can be a real nuisance to constantly find a new bill in the mail every few days after you thought you tackled the last one for the month.
Not only that, but some of those bills can come with sky-high interest rates. The higher the rate, the more expensive your debt will be. Credit cards, in particular, are notorious for charging super high rates. If you only make minimum payments every month, that outstanding balance will just grow, making it increasingly difficult to pay that debt down.
If you’re finding yourself drowning in mounting debt, consolidating it might be a great option. By consolidating your debt, you can essentially combine it all into one larger, easier-to-manage debt. And with a lower interest rate, that debt can be more affordable, which will allow you to pay it down faster.
As a homeowner, you have the unique ability to borrow against the equity in your home to be used for all sorts of things, including consolidating your debt. So, how exactly is this done?
Home Equity Loans For Debt Consolidation
Through a home equity loan, you can use the equity you’ve built up on your home to be used to consolidate your high-interest debt. With timely mortgage payments, appreciation in value, or a combination of the two, you might have more equity in your home than you think.
A home equity loan is basically a loan that’s secured against the equity in your home. You’ll receive a lump-sum amount that you can use to consolidate your debts.
Home equity is defined as the difference between the value of your home and the amount that you still owe on your mortgage. So, let’s say your home is currently valued at $600,000. If you still owe $400,000 on your mortgage, that means you have $200,000 in equity. While this is a simplified calculation, it gives you an idea of what home equity is.
Lenders usually require that borrowers have at least 80% equity in their homes before approving a home equity loan. So, in the example above, you would have more than enough equity to qualify for this requirement. That said, there are other criteria that you’ll need to meet, including having a decent credit score (at least 680) and a sufficient income to support additional loan payments.
If you are approved, you can use the money from your home equity loan to pay off all your creditors and lenders. Then, you’ll be left with just your home equity loan payments.
If you can secure a home equity loan with an interest rate that is significantly lower than some of the rates you were being charged on your other debts that you paid off, you can save money and make it easier to pay down your debt sooner.
The Bottom Line
A home equity loan can be a great way to get your hands on the money needed to pay off all your current lenders and creditors and end up with only one, lower-interest debt payment. If you own a home and have some equity accumulated, this financial arrangement might be suitable for you.
Just make sure that you are financially comfortable with making these payments. If you default on your home equity loan payments, you risk losing your most valuable asset – your home – since this loan is collateralized by your house. As such, be sure to take the time to verify whether or not your current finances can support these monthly payments.