When too much debt starts to eat away at your finances, you might want to look into debt consolidation strategies to help you manage your debt. Though there are a lot of options, using a home equity loan to pay off debt could be the most efficient way to financial freedom.
Using a Home Equity Loan to Pay Off Debt
Home equity loans are great tools to help you with home remodels, educational expenses, or just to have available to absorb emergency expenses. Leveraging a home equity loan to pay off debt can also be a lower-cost way to get debt free, but there is much to consider.
What is Home Equity?
The equity you have in your home is basically the portion of your property you own that you have built through paying your mortgage. Another way of thinking of equity is the difference between what your home is worth and what you still owe on your mortgage.
Home equity loans are second mortgages that tap into that equity as collateral to help you secure a new loan that generally has a lower Annual Percentage Rate (APR) than credit card debt or other loans.
HELOC vs. Home Equity Loan
A Home Equity Line of Credit (HELOC) is like a second mortgage that provides a line of credit, allowing you to pull funds as needed during the draw period, which typically lasts about 10 years. The great thing about a HELOC is that you only pay interest on the money you borrow, not the full line of credit. However, HELOCs usually have a variable interest rate, so your payments can shift over time.
A Home Equity Loan on the other hand, is a second mortgage with terms separate from your original mortgage, where you receive a lump sum upfront. These loans usually have a fixed interest rate on the entire loan, so you’ll pay the same amount each month that starts right when you take out the loan.
Though Greater Nevada Mortgage doesn’t offer home equity loans, we do offer cash out refinancing for your first mortgage, allowing you to get funds in exchange for the equity in your home.
Benefits to a Using Home Equity Loan to Pay Off Debt
- Lower interest rates – Since you’re using your home as collateral, your secured loan will typically have lower interest rates than credit card debt or an unsecured personal loan. This should help lower the overall cost of your debt.
- Easier credit qualifications – With a secured loan using your home as collateral, you don’t need as high a credit score to qualify compared to other debt consolidation loans, many of which are unsecured. If you are struggling with debt, your credit score may have taken a hit, so having collateral is helpful.
- Streamline your payments – Since you are combining all your debts into one loan, you are simplifying your payments into one monthly installment. You may also be able to lower the amount you pay each month depending on your situation.
Risks of Using a Home Equity Loan to Consolidate Debt
- Risk of losing your home – The biggest risk of taking out a second mortgage is you could lose your home if you fail to make your payments. Before taking out a home equity loan, it’s important to ensure you can pay it off.
- You might be extending your original mortgage – By taking out a second mortgage, you may be less able to pay off your first mortgage and potentially extend how long it takes you to pay it off.
- You may be adding more debt – By consolidating your debt with a home equity loan, you are hopefully paying off all your credit card debt and any other loan. That makes putting more debt onto your credit cards tempting, but that might lead you to even more debt.
Should You Take Out a Home Equity Loan to Pay Off Debt?
Taking out a home equity loan to consolidate debt can be one of the most cost-effective ways to pay off that debt. Since you are getting a second mortgage secured by the equity in your home, you should be getting lower interest rates, allowing you to pay off your debt quicker while saving money.
However, you are putting one of your greatest assets, your home, at risk if you cannot pay off this loan. It’s important to consider carefully how taking out a home equity loan will affect your financial situation and if you will be able to pay off this loan. It’s also important to look at your financial habits that lead to being in debt.
Greater Nevada Mortgage is here to help you make the best decision for your financial health. Greater Nevada Credit Union, GNM’s parent company, also offers free financial education and counseling resources to help you build healthier financial habits.
Connect with one of our expert Mortgage Consultants, and we can explore if using your home equity to pay off debt is the right move for you.