Using Home Equity Loans To Consolidate Your Debts
Many are feeling the strain of having a great deal of debt - perhaps you personally know what that is about. If you own your own home, however, then you may have a solution right at your fingertips. The equity in your home, if you have lived there for a while, may be sufficient to remove all of your other debt - and it could even give you more to take that needed vacation! Here is how you can get access to your home's equity with a home equity loan.
Before you see if your home equity can cover your debts, you will need to know just how much your home is worth. It will be different than the amount you paid for the house, since most homes have increased in value recently.
Determine Your Debt
The first thing you should do is to find out exactly how much you owe. You need to know exactly, and you need to determine that when you get your home equity loan, that you will pay off these debts first.
Calculate The Equity
By knowing what your home is worth now, you can subtract the amount you have paid, and the difference is the amount of equity that you have. This could very well leave a sizable sum - possibly many tens of thousands of dollars. You will also need to make sure you leave 20% of the value of the house alone. Do not borrow it. It you do go over 80%, you will need to pay Private Mortgage Insurance – which you would rather not pay. For more information read our article, 'How home equity loans work'
Choose The Loan
There are several types of home equity loans that will give you access to your home's equity. Here are the three main types and a brief explanation:
- Cash Out Mortgage - This serves as a first mortgage so refinancing will be needed. You use mortgage refinance for the amount you still owe, plus the amount of equity you want.
- Home Equity Loan - A second mortgage, which gives you your home's equity in one lump sum.
- Home Equity Line Of Credit (HELOC) - A second mortgage with an account created with a credit limit which is available through a credit card or check. You only pay interest on the money you use.
It is important that you know that the home equity loan is secured by the home itself. You need to be careful about how much you borrow, because a failure to successfully make the payments will probably result in a foreclosure. Only borrow what you need to for debt consolidation and make sure that you get the best home equity loan available.
While it can give you a fresh start financially, it will not necessarily prevent you from getting into debt again. Only changing your spending habits will effect that.
In order to get the best deal and save the most money when you tap into your home's equity, you definitely need to shop around and compare one company's quotes with another. Also, remember that a second mortgage will require an additional monthly payment.
You should also be aware of the FTC's warnings about home equity loan scams, more government advice on putting your home on the line and also advice from the federal reserve on What You Should Know About Home Equity Lines of Credit