Debt Consolidation with a Home Equity Line of Credit

2010 March 11

Consolidate your debt with a home equity loan or home equity line of credit

You have high interest loans and have equity in your home, you might consider consolidating your debts with a home equity loan or line of credit. Use your home’s equity to replace credit card, car loan and other high-interest debt.

Debt consolidation comes with the possibility of a single payment, and a low interest rate that allows you to pay off your debts in less time for less money. If you’ve got the equity, you have two options: Home Equity Loan or Mortgage Refinance.

A home equity loan or line of credit is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses.

Equity is the difference between how much the home is worth and how much you owe.

With a home equity debt consolidation loan or line of credit from you can take advantage of:

  • A lower interest rate: Rates on home equity loans and lines can be lower than credit card rates by 7-10% or more. With lower interest rate, your interest costs are reduced.
  • Tax savings: Interest payments on home equity loans or lines are potentially tax deductible, but credit card and auto loan interest payments are not.
  • Time savings: Make a single payment to your debt consolidation home equity loan or line rather than multiple payments to many creditors.

There are two types of home equity debt: home equity loans and home equity lines of credit, also known as HELOC. Both are sometimes referred to as second mortgages, because they are secured by your property, just like the first, or primary, mortgage. Home equity loans and lines of credit usually are repaid in a shorter period than first mortgages.

Debt Consolidation Home Equity Loan. Home Equity Loan is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan.

Debt Consolidation Home Equity Line of Credit. Home Equity Line of Credit, or HELOC, works like a credit card because it has a revolving balance. A HELOC allows you to borrow up to a certain amount for the life of the loan — a time limit set by the lender. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again, like a credit card.

A home equity loan or line of credit allows you to borrow money, using your home’s equity as collateral. Collateral is property that you pledge as a guarantee that you will repay a debt. If you don’t repay the debt, the lender can take your collateral and sell it to get its money back.

With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don’t repay the debt. This one of disadvantage of consolidating unsecured debts such as credit cards into home equity debt.

Mortgage Refinance to Pay Off Expensive Debts

With a refinanced mortgage, for the same mortgage payment or less than you’ve been making each month, you can pay off more expensive debts.

Don’t pay for more of a refinance than you can afford.

Points and fees are negotiable. Check mortgage rates, points and fees with at least three to five lenders.

Pay closing costs up front. If you have the cash, paying closing costs will save you on financed interest charges over the life of the loan.

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