Research result shows that credit card debt is the main debt problem for most of debtors. Credit card carries high interest rate, if you continue delay your credit card payment or continue to pay only the minimum due amount, it will quickly roll up the total debt and drag you into a serious debt trap. Hence, credit card debt must be resolved fast to avoid making your debt situation worse. If you have build up your home equity, you are at a good position to get your debt issue resolve by consolidating your credit card debt and other high interest debt with your home equity.
Why consolidate debt using your home equity?
There are at least 3 good reasons to consolidate all your debt with home equity:
1. Lower interest rate. As compare to other loan, home equity loan is comparatively much lower that other loans, which make it easier to be paid off. If you continue repay the same amount you pay now and the interest rate has been lower, meaning that you pay more toward the principal and making your debt to be paid off faster.
2. The interest of your home equity loan is tax-deductible; you save on interest pay for home equity loan from the tax-deduction.
3. Lower monthly payment. If you find hardship repaying your current debt repayment, then selecting longer repayment term with a home equity loan will help to lower the monthly payment so a level that is affordable by your current financial situation. Be aware that by taking long period of loan term, you will be paying more in total interest.
Consolidation Debt Using Home Equity
There are three ways to consolidation debt using home equity: Cash-out Refinance, Home Equity Loan and Home Equity Line Of Credit.
In this method, you are getting a new mortgage with the amount high than your current mortgage and use it to pay off your current mortgage and have enough balance to clear your credit card debt. For example, your existing mortgage still remains $100,000 and you owe credit card debt of $12,000; you will need to refinance your existing mortgage to get $112,000 of new loan to pay off your existing mortgage plus the credit card debt.
Home Equity Loan
Home equity loan is a second mortgage which you use you home equity to pledge for a loan. For example, your home market value is $150,000 and you still owe for a mortgage of $100,000; this means you have a home equity equal to $50,000. You can apply for a home equity loan up to the value of home equity, in this case is $50,000. But normally, lenders will only approve a home equity loan up to 80-85% of your home equity.
Home Equity Line of Credit (HELOC)
Credit card has credit limit so do the home equity line of credit, the difference between these two is home equity line of credit use your home equity as the revolving line of credit. Based on your home equity, lenders will pre-approves you with a credit limit where you can withdraw the amount up to that credit limit. . In the home equity line of credit, interest only count on the amount being draws out.
What You Should Not Do With Your Home Equity
Although home equity is a good option to resolve your debt issue, but you will put your home at risk if you default the home equity loan repayment. Hence, don’t get the loan up to the maximum value of you home equity can provide you because you are adding more debt into your account by doing that. Use your home equity to apply for loan that enough to repay your consolidated debt. And remember to repay the home equity loan on time so that you won’t lose you home because of foreclosure.
You can always convert home equity to pay off your consolidated high interest debts and save with lower interest and lower monthly repayment. But be aware for the risk of losing your home if you fail to make repayment. Hence, you need to put your repayment plan in place to ensure you won’t miss any repayment schedule of your home equity loan.