Using a Home Equity Loan to consolidate your debt is a smart way to manage your debt and reduce your monthly payments. And you don't have to have perfect credit; more and more frequently consumers are getting home equity loans with bad credit, easing the burden of debt and freeing them to pursue their financial dreams.
What is Home Equity?
The equity in your home is calculated by taking the current value of your home and subtracting your mortgage balance. For example, if your home is worth $150,000 and you have a mortgage balance of $100,000, you have $50,000 of equity in your home. A home equity loan allows you to borrow money using this equity of $50,000 as security for the loan.
Home Equity Loans generally have a much lower interest rate than most credit cards and other unsecured loans. Since a Home Equity Loan is a secured loan you can set your payment term at a FIXED rate so that you can plan exactly how much to budget each month. It also provides you with the convenience of only having to write one monthly check.
Another benefit in using this approach to consolidate your bills is that the interest charges on your Home Equity Loan, in almost all cases, can be deducted from your taxes (consult your tax advisor to see if you qualify).
Here is an example - You have a home worth $150,000 and are currently paying on the following debt:
|
Credit Cards
|
Balance
|
Monthly Payments
|
New Monthly Payments
|
|
MasterCard
|
$2,750.00
|
$82.50
|
|
Visa
|
$3,000.00
|
$90.00
|
|
Discover
|
$2,500.00
|
$75.00
|
|
American Express
|
$3,750.00
|
$112.50
|
|
Credit Card Totals
|
$12,000.00
|
$360.00
|
$246.20
|
|
Car Payment
|
$25,000.00
|
$366.45
|
$366.45
|
|
Mortgage
|
$100,000.00
|
$768.91
|
$768.91
|
|
Grand Total
|
$137,000.00
|
$1,495.36
|
$1,381.56
|
You have $50,000 equity in your home (subtract mortgage balance from the home’s worth). Take the total of the credit card debt of $12,000 and consolidate that into one new Home Equity Loan of $12,000 at 8.5% interest spread over five years would generate a new monthly payment of $246.20. That's a monthly savings of $113.80! Every month! That's a savings of $1,365.60 the first year and $6,828.00 over the five years of the loan.
Using a Home Equity Loan to avoid a financial hardship makes sense and can help you get a fresh start rather than to continue your current financial struggle.
So if the following is happening to you because of uncontrollable debt:
- Late fees and penalties
- Unsure of which bill to pay first
- Family arguments over money
- Afraid to answer the phone because of creditor harassment
Know that there is a common sense approach that will allow you to pay your current monthly bills easily, get out of debt sooner, repair your credit rating, and at the same time save money.
*Unsecured loans are things like credit cards, department store cards, personal signature loans, lines of credit from a bank or credit union, medical bills, and past due utility bills. In other words, any money that you owe that did not require that you put up any collateral to obtain.
A secured loan is a debt such as a home mortgage or auto loan and is “secured” by the creditor by placing a lien on your home or car. The loan is secure because a creditor can repossess the car or foreclose on the home in order to recover the overdue unpaid balance of the money they loaned.