Home equity loans can be an excellent source of funds when used wisely. One of the ways in using the cash from a home equity loan is to consolidate your debts.
Why is it wise to consolidate your debt with the money from your home equity? There are several good reasons which include:
-Paying a much lower interest rate than you pay on your credit cards. In some cases it can be a third of what a credit card company is charging.
-You can most likely deduct the interest expense on your home equity loan whereas you can not on credit cards. This is a huge benefit.
-All your debts are consolidated into one monthly loan payment.
So, what are your options when it comes to using your home equity to pay off your debts? Again, you have choices you can take advantage of including:
Home Equity Loan
Also known as a second mortgage, you can take the equity in your home and borrow against it at a favorable rate of interest. You get the cash in one lump sum and can then pay off your debts or use it how you wish.
Home Equity Line Of Credit
Similar in nature to a credit card, HELOC allows you to draw funds from your home equity and only make payments on that amount, not on an entire loan.
Cash-Out Refinance
This is the third option you have and involves refinancing your existing home mortgage. You would refinance the new mortgage at a greater amount and take the extra money in cash. For example, you want to pay off $25,000 in credit card debt and owe $150,000 on your current mortgage. You could do a cash-out refinance to a new loan amount of $175,000.
Using your home equity to pay off high interest debts can be a wise decision if done right. Just be careful to not start using those credit cards again.
