How to Use Home Equity to Pay Off Your Debt

Struggling to keep up with debt? Are you looking for a way to get out from under it? A home equity loan may be what you need to get everything manageable. However, the amount you can borrow may be limited. Most banks will only finance a loan at 80% to 85% of the home’s value minus your current balance. The equity in your home can solve the problems that debt cannot.

If you are trying to figure out how much that could be – consider this. Suppose your home has a market value of $200,000 and you only owe $100, 000 then you have $100,000 in equity. With these numbers, you could very well be able to borrow anywhere from $80,000 to $85,000. It doesn't mean you need to max out – but consider all your needs so that you can take out enough to cover them.

Besides debts, you may have other pressing needs. For example, you might need to fix your roof, update your kitchen, or pay for your kid's college. Whatever your reason, a home equity loan may be the solution. Of course, the amount you can take out is limited to available equity, but it also can depend on your credit history and available income.

Key Takeaways:

• ???You will learn about the different options for getting access to your home equity.
• You will discover viable alternatives to using your home equity.
• Financing can be challenging to understand; here, you learn what you need and some of the terminology you need to know before deciding on your options.
• Financially strapped homeowners can reach out to one of the industry leaders in home equity financing and get the cash they need for emergencies.

What is a Home Equity Loan?

Home equity loans are loans that are secured by your home. It is for a fixed available value. Like other loans and mortgages, you repay a set payment over a specified period. Just like if you didn't pay your mortgage as agreed, the same thing here applies; if you don't meet your obligations – your lender can foreclose.

Before you begin:

1. Ask Questions: Every lender you meet will have different loan plans and options. The key to understanding is to ask questions. Loans are more than just the annual percentage rate. Know what is involved for each lender.
2. Get Recommendations: Talk to your neighbors, friends, and family and get recommendations. For example, who have they used as a lender? How happy are they with the service?
3. Check Your Credit Score: You should know your score when you walk in for your application process. The higher your credit score, the more available options you will have.
4. Pay Attention to Fees: When you check the different lenders, look over the fees very carefully. For example, the APR for home equity loans includes points and financing charges; also, note any other fees that could consist of application fees, loan processing fees, origination fees, appraisal fees, or broker fees. Be sure to ask for a specified list of what fees apply to what item. Oversee the details because if points and fees are worked into your loan amount, financing these charges will cost you.
5. Compare Rates: Most people compare rates but forget to compare other features. Therefore, checking rates is an important consideration when choosing a lender.
6. Check Alternative Options: Many alternative options can help you pay down debt. For example, you may consider getting cash from your life insurance policy or even try a reverse mortgage, depending on your situation.

Points are bank terminology for prepaid interest. Many lenders require you to pay this prepaid interest – at the closing of your loan. That is, upfront. Points are equivalent to 1% of your loan amount. For a concrete example, if you take out a $100,000 loan, a single point would equal $1000 that you would pay when you take out the loan.

If you are strapped for cash, this may seem like a challenge. Lending institutions use points to lower your interest over the life of the loan. If the bank is offering the loan for five years, but you think you could pay it off in two – negotiate on the points. Paying that interest upfront is based on the idea that you will take the entire loan period to pay it. This interest isn't for your benefit, so speak up! Most banks will work with you on this.

Qualifying for a Home Equity Loan – What Matters

In recent years, home equity loans and lines of credit have changed the qualifications. It is harder today than ever to qualify for a home equity loan. The rules haven't changed; just lenders have become a bit more selective in their qualification process.

The two main things you need to qualify are available equity in your home and a decent credit score. The higher the credit score and the more equity available in your home means your chances of getting a great deal from your lender increases.

?What are the Advantages of Using Home Equity to Pay Down Debt?

The advantages are many to get a home equity loan for paying down debt. The average annual percentage rate for most credit cards for those with excellent credit in 2021 runs between 14.68% and 22.09%. If you have a significant balance, this could lead to lost money spent on interest.

For example, if you have $10,000 owed on a card and paid it off under two years with a rate of 16% - you would have spent $1750 in interest charges. So the total amount paid back would be $11750.

Let’s look at the same amount with a home equity loan. While home equity loan APRs are not quite as low as refinancing. You could easily find banks offering rates as low as 4.5%. At that rate, the same $10,000 debt you owe, paid off in the same two-year period, would have an interest charge of $475.47. Amazing savings!

Take a look at some of the other advantages to paying off debt or other expenses with a home equity loan:

• You can spend the money on anything without restriction.
• The loan is given to you in one lump sum. So you only have a single process of getting approved, and the money is in your hands.
• Using home equity to pay down debt can lower debt faster.
• With good payment history, you can improve your credit score.
• If the funds are used to make home improvements, you could end up increasing the value of your home by far more than you spend.
• If the debt is for a family need, like a wedding or college tuition, you have the peace of mind that these important life moments are covered.

Are There Disadvantages to a Home Equity Loan?

Everything about getting a loan of any kind should be weighed and thought through. So far, we have mentioned advantages, but before signing on the dotted line, you also need to consider the downfalls. While paying off debt with a home equity loan can help you cover expenses, pay off high-interest credit cards – you should carefully consider some of the following disadvantages.

• Risking Your Home: Carefully consider your ability to pay back this loan amount. Can you pay it in bad times? A home equity loan can be based on your home collateral to secure the loan. If you can't make the payments, you can risk being foreclosed on or forced to sell your home.
• Underwater Assets: During the days of subprime mortgages, a homeowner's equity and home value were termed “underwater” if the homeowner owed more on the home than its current value. Since home values rise and fall, if you take out too much of your hard-earned equity – you could find yourself underwater.
• Added Debt: Depending on why you take out a home equity loan, you could wind up adding to your debt instead of lowering it. Home equity loans can be used for any reason, like home improvements, car purchases, college tuition, and more. However, if you choose to use your loan for reasons other than paying off or consolidating debt – you could be accumulating a much larger debt.
• Closing Costs and Fees: Home equity loans are similar to a second mortgage. Points are applied to the loan just like your original mortgage. Closing costs are generally between two and five percent of your loan amount.

Source: https://www.discover.com

What Options Are Available if I Can’t Use Home Equity?

If a home equity plan doesn’t work for you, look at other options available. There are a variety of options that you can consider for getting the cash you need. A few great alternatives to getting a home equity loan are listed below.

• Access Your 401(k) Plan: Most 401(k) plans allow you to borrow as much as $50,000. It does have to be repaid, but you may even get a lower interest rate. A benefit of this option is that the interest you pay back on the loan is deposited back into your 401(k) plan.
• Debt Consolidation Loans: If you have high credit card debt and are looking to pay them off quickly, a debt consolidation loan almost always has a lower percentage rate than the average credit card.
• Balance Transfers: Another consideration is to move all of your credit card debt to the card with the lowest annual percentage rate.
• Insurance Values: Life insurance can be an asset. Find out if you are eligible to take out a loan from your insurance. This loan type is sometimes referred to as a life-settlement loan. Many insurance providers are also in this marketplace.
• Reverse Mortgages: Reverse mortgages are a way to get cash out of your home that allows you to keep your home. It is still a loan and will need to be repaid when you move, sell, or pass away.
• Home Equity Credit Line: Also known as HELOC, this is similar to a home equity loan. However, you can work with the bank to take out only the amounts you need for your project or debt. It is available if you need it for something but isn’t a one-time set lump sum.
• Mortgage Refinancing: Also known as cash-out refinancing, since interest rates on home loans have drastically reduced in the last several years, many individuals are accessing some of the equity in their homes through refinancing. The lower rates can save hundreds each month in your house payment, freeing up extra cash you can use for paying down your debt.

Becoming Debt-Free Using Your Home Equity

Debt-free? Yes, you can choose to use the equity in your home to become debt-free. This choice may be an excellent option for empty-nesters. Now that the kids have moved out - consider downsizing.

Yes, this would require the sale of your current home. Consider this – if your home value is approximately $300,000 and you only owe $100,000, this leaves $200,000 is available. If you can sell your home at or above its estimated value, you could choose to downsize to a smaller, less-expensive home. You could easily find a house large enough to accommodate visiting children and eliminate your mortgage and any other outstanding debt.

Learn more about making the most of your home’s equity:

Finding Help Figuring Out the Best Option for You

Yes, there are many options to consider when trying to figure out how to use your home equity to lower your debt or make improvements. Talk with friends and neighbors who have been through this process to weigh your options. There are many banks that will offer credit counseling to their clients. Ask if one of their financial specialists will help you uncover options that you may have not yet discovered.

Above all, take it slow. This is a major financial decision and you want to solve your financial problems, not create more. ?