Home Equity Loan Can Be a Powerful Tool for Debt Consolidation - SPONSORSHIP

Are you drowning in credit card debt, but have sufficient equity in your home to pay off that debt? You may want to consider a home equity loan as a tool to consolidate that debt, but be careful how you proceed.

Any debt you take against the equity (amount your home is worth above what you owe on your mortgage) in your home will be considered secured debt, which means the debt is secured by the collateral in your home. If you can't make the payments, the bank can foreclose on your home. Any debt on credit cards is most likely unsecured, which means the debt is not secured by an asset. The bank has nothing to take from you if you don't pay.

But, if you pay off unsecured credit card debt with debt secured by your home using an equity loan, you do put your house in jeopardy if you can't pay the loan. So, if you decide that debt consolidation using an equity loan is a good idea, be sure you'll be able to make the payments.
How Can an Equity Loan Help You?

Suppose you have credit card debt of $20,000 upon which you are paying nearly 20 percent interest. Your payments could be as high as $350 a month for 30 years.

With an home equity loan, if you have a good credit score you may be able to get an equity line for as little as 5 percent. That could save you a lot of interest and speed up your repayment time.

Generally before taking an equity loan you should consider whether or not you can pay your debt off in six months or less. If you can, you're better off just paying down the debt and not taking the loan.

Use this calculator to see what you can save by consolidating your debt.

Two Ways to Borrow on Your Home's Equity

You can choose from two types of loans -- one is a fixed-rate equity loan and the second is a variable-rate home equity line. If you take a fixed-rate equity loan, the loan will be for a set amount with a fixed interest rate usually for about 15 years, but it can be as short as 5 years or as long as 30 years. When you apply at the bank, the bank will let you know what loan terms are available. You will likely need to pay an origination fee up front of several hundred dollars, plus the cost of an appraisal and title insurance. Current rates are about 7.5 percent.

The second type of loan you can take is an equity line, which will have a variable interest rate. Right now the average loan rate is 5.15 percent, but that rate is variable, which means when the Federal Reserve decides to raise the interest rate your interest rate and payments will go up. You may be required to pay an up front origination fee plus the cost of an appraisal and title insurance.

If you choose the fixed-rate loan, you're guaranteed that rate until you pay off the debt. Once you pay off the debt the loan is closed. If you choose an equity line, you can pay off the debt and then use the money again to consolidate other debt or to do work on your home. Some people even choose to use an equity line to buy a car. So an equity line is more like a credit card with a revolving balance.

The most important thing to always remember when using a fixed-rate equity loan or a variable rate equity line is that the money you borrow is borrowed against your home. If you can't make the payments, you can lose your home. So tread carefully and make wise financial choices.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.
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