Pros and Cons: Home Equity Loans for Debt Consolidation
You've been making your mortgage payments for years, plus your home has increased in value over time. It’s likely you have plenty of equity in your home. If you’ve also accumulated a significant amount of unsecured debt, you may be looking at your equity to help relieve the financial pressure that debt brings.
Some financial experts would caution against “spending” the hard-earned equity you’ve built in your most valuable asset — your home. But, if you’re drowning in monthly payments and high-interest debt, you should be able to slash the amount of interest you’re paying, allowing you to pay off that debt much faster, perhaps even earning some tax deduction benefits. The real financial error is consolidating and then running up more unsecured debt, landing you with higher debt and less equity in your home. If you’re going to consider this kind of debt consolidation plan, first commit to change the habits that got you underwater in the first place.
Home Equity Loans for debt consolidation might be an excellent option for some people, but not for everyone. Here are some pros and cons to consider before using a home equity loan to pay off your debt.
With a lower interest rate and only one loan payment, your total loan payments might be less than your current combined individual loan payments. This could save you money.
Lower interest rate: The interest rate on a home equity loan is much lower than rates on personal loans and credit cards.
One payment: A home equity loan allows you to have one easy payment, instead of several payments to several lenders each month.
Lower total monthly payment: With a lower interest rate and only one loan payment, your total loan payments might be less than your current combined individual loan payments. This could save you money.
Tax benefits: When you borrow on your home’s equity, the interest you pay on the loan should be tax-deductible (up to a government-imposed limit) if the money borrowed goes toward improving your home.1
Foreclosure: With your house as collateral, you risk foreclosure if you can't pay. If you fall behind on your payments, you could lose your home.
Real estate market downturn: If your home's value drops, you could wind up owing more than it's worth.
Spending habits: Home equity loans are only helpful if you can change your spending habits that led to your debt in the first place. If you use a home equity to consolidate your debt but continue to use your credit cards, you are only making your debt situation worse.
Other options to consolidate debt:
Personal loans: A personal loan is an unsecured loan with a fixed payment for a specified period. Personal loan interest rates are generally higher than home equity loans since your home does not secure the loan.
Credit card balance transfers: If you have good credit, a 0% or other low balance transfer offer could be an inexpensive option — if you can pay off your consolidated debt before the no or low-interest period ends.
Debt management and budgeting: This is the best strategy. You can develop a long-term plan to pay off your existing debt and develop a monthly budget to ensure you live within your means, without the need for credit cards and other loans.
If a home equity loan is a good option for you to consolidate your debt, Texell's Home Loan Heroes are here to help. You can get more information and check rates on TexellHomeLoans.com, and when you are ready to get approved, our online process is the best in the business. If you have questions, we are happy to help at 254.774.5104.
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