What should you do if your debt consolidation plan calls for a Home Equity loan?
We want you to make informed decisions. The links to this page that are clearly marked may lead you to a partner’s website. This will earn us a referral fee. For more information, please visit Paydaychampion.
A home equity mortgage can be an option for homeowners with too many debts.
Home equity loans are not always risky. Your home is the collateral and the interest rate.
Richard Ortoli, cofounder, New York City Law Firm Ortoli Rosestadt srl says, “As long you have a stable source income and you know you will be capable of repaying the loan on a timely manner, the lower fixed rate of a loan for home equity is a wise choice.” However, it’s important to pay your monthly payments on time in order to protect your home.
Here are some ways to determine whether a home equity loan is the right option for debt consolidation.
What is a mortgage to your home equity?
Alex Klingelhoeffer from Exencial Heritage Advisors is a wealth advisor who often refers to a home equity loan as a second or additional mortgage. Klingelhoeffer has provided a hypothetical example.
- House purchased for $250,000 in 2015
- $ 50,000 downpayment
- Five years later, it was worth $ 350,000.
- $ 180,000 Mortgage Balance
- This is how 2020 will look in this instance fairness
- In property, the current value is $ 170,000
- Klingelhoeffer explains, “Banks will permit you to borrow money against [the equity] via home equity loans or home equity lines of credit (HELOC).
HELOCs, or home equity loans, allow you to borrow money by using the equity in your property. HELOCs function more like credit cards. The borrower can withdraw a lump-sum amount from their home and then pay the loan back with fixed payments at fixed interest rates. HELOCs are variable interest rate loans with non-fixed payments.
Because you will be using your home as collateral, interest rates on home equity loans tend to be lower than other types of financing. Credit cards are also less common. In some cases, the lender may place a lien against your home if you don’t pay the monthly payment on time.
Can I consolidate my debt by using a home equity mortgage?
Borrowers can take a lump sum from their home equity loan and use it in any way they choose. Home equity loans may be a great way for borrowers to borrow cash to pay off high interest debts in one lump sum.
Home equity loans typically have lower interest rates, compared to high-interest loans such as credit card cards. A home equity loan may be a good choice for consolidating your debt and paying it off.
A home equity loan is a great way to consolidate your debt. Because your home is at stake, it’s important to only apply for this type of loan when you feel confident you can pay the monthly payments.
One caveat: you should ensure you can make your loan repayments. Your home and collateral could be lost if you default on your loan payments. Ortoli explained that it is important to pay these bills on time to avoid spiraling or exacerbating debt. Ortoli explained that only a home equity loan should be used to consolidate debt.
Consolidating debt with a home equity loan: What are the pros and what are the cons?
- Interest rates are usually lower than those for other loans.
- Ortoli believes it may be easier for you to qualify “since secured debt”
- You are able to shop around for the best rates and terms from different financial institutions.
- The funds are received as a lump sum so that borrowers may immediately pay off large loans.
- There are no restrictions regarding the borrowing of funds.
- Prices are generally set.
- The lender may use your home to secure a loan.
- Ortoli states that because the loan is so easy to get, it could be too accessible for people who don’t have enough money.
- Home equity loan borrowers might end up with more debt than their home, leading to a bigger hole.
- This loan can be added to an existing mortgage.
Consolidating debt in other ways
Klingelhoeffer explains that although consolidation can be a powerful strategy, it is not a cure. “The true cure is positive cash flow, and the ability to repay your debt at a manageable amount. The ability to release monthly cash can help you channel money into your retirement account and emergency fund. Experts will tell you that starting early is a good way to build wealth.
There are many options to consolidate debt.
Balance Transfer Credit Cards: Balance transfer cards can offer an introductory 0% rate. Most cards offer an introductory 0% interest rate for 12-18 months before the APR becomes effective. The card can accept multiple debts. If you pay off the card before the introductory period expires, all your payments will go 100% for the balance. This strategy can reduce interest costs and help to pay off debt faster. The type of debt that can and cannot be transferred may vary depending on the issuer. However a home equity loans does not have any limitations on its use.
Personal: A personal loan can be either a better or worse option, depending on what APR you get. The personal loan will be unsecured and you won’t need to use your house as collateral. You may be able to get a personal loans rate that is lower than your home equity. The personal loan funds are generally available for you to use however you please. Prepayment and origination fees should be avoided.
Debt management plan: Credible credit counseling agencies are available for help if you have trouble paying your debts. We recommend you only use a credit counseling agency approved by the National Foundation for Credit Counseling.
Plan for Debt Settlement: A debt settlement service can be a great help in negotiating your debts. However, this service is not completely free. This service doesn’t cost anything. However, creditors can contact you directly to help you negotiate or settle your outstanding balances.
Refinancing: The interest rates right now are very low so homeowners may be eligible for great loan terms. Chuck czajka of Macro currency Concepts in Florida, a financial consultant, says that refinancing a 30-year loan can give you the opportunity to spread your loan over 30 years instead of 10 as with a traditional home equity loan. If your monthly mortgage payment is reduced by refinancing, you can then use the extra cash to repay your debt.
Another option is to cash refinance. You could take out a new mortgage that is more than what you owe and get a check for it. The difference can be used at closing. Czajka states that one option is to refinance your entire mortgage, and then take out the equity necessary to pay the debts. Pay attention to the closing costs. Closing costs can be higher than the amount of your debt.
How to get a Home Equity loan for debt consolidation
Here are the steps to help you get started if a loan for home equity is what you want.
- First, it is crucial to know the market value of your house in order to calculate your equity.
- For a better rate, check your credit score.
- Czajka explains that you can obtain a home equity mortgage to consolidate your debts. “This bank will probably know you and be in a better position to assist you with the home equity loans process.
- Compare rates, terms and fees from at least three lenders before you submit your application.