As a homeowner who has been paying down your mortgage for a while, you may be able to use the equity you already hold in your home to pay off high-interest debt. Let’s take a closer look at using a home equity loan for debt consolidation.
Emergency Exit: Using a Home Equity Loan to Escape High-Interest Debt
If you’re a homeowner who owes significant money on credit cards, unpaid bills, or personal loans, the equity you already own in your home might allow you to swap your high-interest debt for a longer-term, lower-interest home equity loan.
While taking this route might work well for disciplined borrowers who can stick to a long-term plan to manage their debt, it’s not for everyone. Read on to learn about the advantages and disadvantages of using a home equity loan to consolidate high-interest debt.
We’ll also take a look at how you would go about doing this, as well as some other methods people use to tackle high levels of debt.
Pros of Using a Home Equity Loan for Debt Consolidation
If you’re struggling with a significant amount of revolving or short-term debt, consolidating your debt into a second mortgage offers some strong advantages. These include:
- You get a single lump sum payout to settle your debts immediately
- You get a much lower rate than on your credit cards or overdue bills
- You pay one bill once a month, rather than juggling multiple payment deadlines
- You pay the same amount every month at the same rate for the term of the loan
- You avoid further late payment penalties or overdraft fees
- You can improve your credit score by reducing your high-interest debt and continuing to pay down both your loan and your mortgage.
Cons of Using a Home Equity Loan for Debt Consolidation
At the same time, tapping your valuable equity to pay off short-term debts also has disadvantages. These include:
- High upfront loan costs, including appraisal fees, closing costs, and other expenses
- You now need to repay both your mortgage and your home equity loan
- While you save money each month, you’ll still pay a lot of interest over the years
- With your short-term debts out of sight, you might be tempted to borrow more
- If your house falls in value, you may owe more than your house is worth
- You need to pay off your home equity loan before you can sell your house
- You could lose your house if you get behind on payments on either your home equity loan or your mortgage
How to Get a Home Equity Loan
The first step in seeking a home equity loan is to determine how much equity you already hold in your home. Your equity is the amount your property is currently worth less what you still owe on your mortgage.
While your home may have increased significantly in value and you may be able to borrow up to 100% of this equity from some lenders, because you are not reinvesting this money in the property itself, you should borrow the smallest amount you can to settle your debts.
Applying and qualifying for a home equity loan has many similarities to when you took out your original mortgage, although approvals can be much quicker than for a full mortgage.
Key steps in the process include:
- Check your credit score: This will give you some idea of how likely most lenders will be to give you a loan. Try to improve your score by paying off some of your smaller debts.
- Apply for a loan: Complete and submit paperwork, along with details of your income, assets, and outstanding debts and provide details on why you want a loan.
- Pay any application, title check, or processing fees plus possible fees for an appraisal of the value of your home.
- Close on your loan: Sign documents and pay any closing costs and conveyancing fees.
What Is the Best Way to Consolidate Debt?
Using a home equity loan to pay off debts is not an ideal route for everyone. Most home equity loans come with significant closing costs and fees. Unless you owe a lot of money, that could cost you more than you end up saving.
Using a home equity loan to consolidate debt makes the most sense if you have significant short-term debt but also have a consistent income to pay down your increased long-term debt burden.
If your debts are relatively small or a consistent income isn’t a guarantee, you might be better off considering other debt consolidation alternatives, such as:
- Transferring debt to a lower-rate balance transfer credit card
- Borrowing a secured or unsecured personal loan
- Seeking credit counseling or negotiating with your creditors
- Engaging a debt settlement company, that will renegotiate your debts for a fee
Let Us Help You Get More Out of Your Home
Whether you need cash for a remodeling project, to pay for your child’s education, or to consolidate debt, you can tap into the equity you’ve already built up in your home with a home equity loan from Greater Texas Credit Union.
At Greater Texas Credit Union, we’re here to help our members get more out of their most valuable asset with our easy and affordable home equity loans, including:
- Competitive rates
- $0 closing costs
- No appraisals on loan amounts less than $100,000
Click below to learn more about how a home equity loan from Greater Texas Credit Union can help you do more with what you already have!