While debt is incredibly common in the United States with total consumer debt at $17.1 trillion in 2023, there are ways you may be able to ease the burden. If you have debt and are looking for a way to simplify your payments, you might want to explore a home equity loan.
Home equity is the difference between your home’s appraised value and how much you owe on your mortgage. You typically build equity with every mortgage payment you make. This equity is an asset you may be able to utilize for a variety of reasons, including debt consolidation.
Find out if a home equity loan could be the answer for your needs.
What’s a Home Equity Loan?
A home equity loan is a second mortgage that allows you to borrow against the equity you have in your home. Since it’s a separate mortgage from your original, it comes with separate terms and a separate interest rate. You’d receive the money in one lump sum and repay the debt each month in addition to your original mortgage. One important thing to note is that with a home equity loan, you’d put your home up as collateral.
With a home equity loan, you can use the cash to pay off debts with typically higher interest rates, like credit cards. This would help you spend less money in interest over time.
What are the Eligibility Requirements?
Eligibility requirements for home equity loans may vary by lender. However, you’d generally need a certain amount of equity in your home and be in good financial standing, including a solid income source and good credit.
The amount you may be able to borrow is also dependent on your own finances. Many lenders usually won’t allow you to borrow more than 80 percent of the equity in your home.
Why Opt for a Home Equity Loan?
Interest Rate: As stated previously, using the cash to pay off higher interest debt can be beneficial. This could help you save more money in the long run. Home equity loans also typically have lower interest rates than other types of debt, so it could work in your favor to get a home equity loan to pay off a different type of debt.
Predictable Payments: A home equity loan usually has a fixed interest rate, meaning it won’t change throughout the life of the loan. This would help you accurately predict your monthly payments and budget better for other monthly payments or expenses.
Favorable Terms: Repayment periods for home equity loans can generally span up to 30 years which helps with manageable monthly payments. There’s also the potential to borrow more money than other types of loans, depending on how much equity you have in your home. This could help you pay down a large amount of debt.
Alternatives to a Home Equity Loan
If you don’t think a home equity loan will work for your needs, there are alternative routes you may be able to take.
Home Equity Line of Credit (HELOC)
A HELOC is similar to a home equity loan in that it allows you to borrow against the equity in your home. However, a HELOC is a revolving source of credit, much like a credit card. You would be given a credit limit and a draw period, during which you can access your funds. After your draw period, you would repay the loan. Like a home equity loan, your home would be used as collateral which may put it at risk of foreclosure if you’re unable to repay the loan.
Cash-Out Refinance
With a cash-out refinance, you pay off your mortgage with a new, larger loan and receive the difference of funds in one lump sum. Many borrowers use this money to consolidate their debt, make a big purchase or start home renovation projects. While many homeowners typically refinance their mortgage to potentially receive more favorable terms, like a lower interest rate, a cash-out refinance increases your monthly payments since you’re using home equity to receive cash.
Personal Loan
In general, personal loans have lower interest rates than credit cards. So, if you have significant credit card debt, a personal loan might work to consolidate your debt as you may pay less in interest over the length of the loan.
Tap into Your Home Equity
No matter how you choose to simplify your debt, know that unlocking your home equity may be a viable option. Your house isn’t just a property you own. It’s an investment that has the potential to keep giving back to you.
Before you decide to dive into a loan option for your debt, however, it doesn’t hurt to consult a professional about your choices. By refinancing an existing loan, your total finance charges may be higher over the life of the loan due to the extended term. You may want to speak to an experienced loan officer or financial advisor to understand whether or not a home equity loan could work for you.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
