home equity loan pay off debt

home equity loan pay off debt

How Do I Use a Home Equity Loan to Pay Off Debt?

You may be able to leverage the equity you have in your home to pay off your debts.

Your home is not only your castle; it may also be able to help you get out of debt. Most property owners have equity in their homes, and if they have owned the home for many years and/or their property values have increased over time, the equity they have may be considerable. Home equity can be leveraged by homeowners in two ways: through a straight home equity loan or through a home equity line of credit.

Calculate your total debt. If you are like many people, you could have significant credit card debt that you are repaying at high rates of interest. You may have other types of debt, too, including a car loan or student loan. Take note of the interest rate of each debt; some student loans, for instance have a lower interest rate than home equity loans can offer, so you might opt not to use a home equity loan to pay off that particular debt. Add your debts together to come up with a total figure.

Check your most recent mortgage statement to see what the payoff amount is on your mortgage. Also check to see what your property was last appraised for. Now calculate the equity you have in your home. If your property was appraised at $150,000 and you still have $50,000 left on the mortgage note, you nominally have $100,000 of equity in your home. If you apply for a home equity loan, the lender may have your property reappraised, especially if it has been several years sine its last appraisal. This reappraisal could increase or decrease the equity you have in the property.

Calculate the amount you might be able to get in a home equity loan. A lender will determine the most amount of money you can get by using a calculation with a "loan-to-value ratio" (LTV). Here is how this works: most lenders will use 80 to 90 percent as their LTV; bear in mind that the higher your LTV, the higher interest rate you will pay on the loan. If your home is worth $150,000 and the LTV is 80 percent, lenders will consider your starting point at $120,000 ($150,000 times 80 percent). Then they will subtract your existing mortgage to come up with your loan cap; if you still owe $50,000 on the mortgage, your loan cap will be $120,000 minus $50,000, or $70,000.

Take out either a home equity loan or a home equity line of credit. A home equity loan can allow you to pay off your debt, but so can a home equity line of credit. There are positives and negatives to each type of loan. A home equity loan is a lump sum of money at a fixed interest rate, payable over a certain period of time. There are often closing costs to get a home equity loan. A home equity line of credit is a sum from which you can draw whatever you need. You only pay interest on what you draw, and minimum monthly repayments tend be lower than those for home equity loans. There are usually no closing costs, but the interest rate is variable and could increase significantly over time, depending upon market conditions. If you are self-employed and your cash flow fluctuates from month to month, you might not be able to commit to the payment schedule for a home equity loan, and a line of credit would work better for you. Whichever loan type you choose, it has to fit both with your monthly income and your comfort level for financial risk. Do not forget that you still have a mortgage to pay every month.

Pay off your debts with the money you received from the home equity loan or line of credit.

Use your home equity to stay on top of your debts.

Taking control of your credit cards, auto loans and other debts is a great feeling. Use your home equity for debt consolidation to enjoy low fixed interest and just one simple payment every month. You may want to consolidate debt in order to:

Lower your monthly payment and get a lower interest rate.

Combine high-interest debts into one fixed payment each month.

See how great it feels to simplify your life and get on the path to a brighter future by managing your debts.

See why a home equity loan is a great way to consolidate debt.

Borrow between $35,000 - $150,000.

Fixed interest rate so you always have the same monthly payment no matter how the market rates fluctuate.

Save money with low rates, low monthly payments, zero origination fees, and zero cash required at closing.

Some things you can do to get started.

Learn how much home equity you need in order to use it to consolidate debt.

Determine how much you may be able to save by consolidating your debt.

Chat with a Personal Banker to get started, ask any questions or get a no-obligation quote.

Getting your budget back on track.

Consolidate debt and relieve financial stress.

Consolidating longstanding debts.

How much home equity do you need to consolidate your debt?

Managing high debt using the equity in your home.

How do I consolidate debt and start saving?

Question answer section

What are the benefits and considerations of debt consolidation?

Benefits: Using your equity to pay down debt can eliminate stress and worry and put you on a solid path to financial freedom on your own terms. Plus, you'll enjoy the stability of one fixed monthly payment at a fixed interest rate that's probably much lower than what you're currently paying to multiple creditors. With multiple term options, you can choose to save more or save less in interest based on the monthly payment you can afford.

Considerations: The relative benefits of a loan for debt consolidation depend on your individual circumstances and your actual debt payments. You will realize interest payment savings when you make monthly payments towards the new, lower interest rate loan in an amount equal to or greater than what you previously paid towards the higher rate debt(s) being consolidated. Keep in mind, though, while your monthly payments will be lower, in the long term you may pay more interest if the debt is extended over a longer period of time.

Note: No Discover Financial accounts may be paid off with this debt consolidation.

Pay Off Debt with a Home Equity Loan

The consumer is the true engine of our economy. The more people buy, the better our capitalist system works. While consumerism works well on a macro level, sometimes people over-extend themselves on the micro-level and accumulate debt. If you need to get yourself out of the red, consider using a home equity loan.

Being a good American takes a lot of money. Our businesses thrive when consumers are happy and flush with cash. Even in the harrowing days that followed 9/11, our politicians urged us to get out and go shopping.

Pumping money into the economy is a great way to help America, but it can hurt you on a personal level if you're not careful. Very often, people spend too much money on shopping trips, and acquire debt that they simply can't pay off.

If you've been a loyal consuming American who's now heavily in the red, a home equity loan can help you get back in the black.

There are two types of second mortgages: A home equity line of credit (HELOC) and a home equity loan. Both can be used to pay off debt, but each has a specific application.

A HELOC works like a credit card; it's a line of credit that uses the equity in your home as collateral. By switching your debt load over to a HELOC, you can take advantage of the loan's favorable interest rate, which is often much lower than credit cards.

A HELOC is a good choice for paying off smaller amounts of debt, primarily because it carries a variable interest rate. However, if the Federal Reserve decides to hike rates, payment on a large amount of debt could prove burdensome.

For larger loads of debt, consider using a home equity loan. This is a fixed-rate, fixed-amount loan. You borrow the money in a lump sum, and make set payments over a certain period of time. Because you're locked into a rate, you don't have to worry about market fluctuations. It's ideal for large, one-time expenditures like home improvements or debt consolidation.

When you shop for a second mortgage, consider a number of different variables. Look for the lowest rates, the best terms, and the lowest closing costs. Make sure that your home equity lender also has a number of references and excellent customer service. Work with a bank or credit union that bends over backward for your business.

If you've built up a hefty amount of debt by spending a little too much time at the shopping mall, take comfort. You're not alone. Many Americans are in the same boat. However, just because others are in the same financial crunch doesn't mean that you shouldn't take action. Get yourself back on the right track by searching for a home equity loan. It's a smart way to pay off your debt, and get your own personal economy booming again.

Why Tapping Home Equity to Repay Student Loans Is Always a Bad Idea

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Did you buy your home at a fantastic deal during the recession? Has it climbed in value since?

If so, you most likely have a good deal of equity in your home. This presents an opportunity: you can “cash out” by refinancing your mortgage or opening a home equity loan at low interest rate.

So should you tap into that equity to repay your pesky student loan debt?

The Problems of Using Home Equity to Pay Off Debt From College

Student loans and home equity do not mix. Let me repeat: using a home equity loan to pay off student debt is a terrible idea that could be detrimental to your finances and your family. As attractive as it seems on the surface, don’t put your financial security and your home on the line to pay off student loans. The financial risk isn’t worth it.

I know you’re probably thinking, “But why not? I could pay off all of my student loan debt and be free and clear. I’m already paying my mortgage anyway.” Let’s explore all the reasons why this is a bad idea:

You’re not actually paying off your loans.

You won’t actually pay off anything, you’re simply reshuffling your debt — your student loan debt will have essentially moved from one account to another. It’s not paid off, you still have the debt, and it’s now just under a new name. Instead of “student loan debt” it would now be “home equity loan debt.”

This new debt might have a lower interest rate (or not), depending on your student loan interest rates. But it also carries additional risks. And that leads to my next point…

You’re putting your home at risk.

Taking out that balance against your home’s value could put your family in jeopardy if financial emergencies arise. What will happen if you suddenly find yourself laid off from your job or facing enormous medical bills? What happens if you can no longer afford your equity loan payments?

If you turn your student loan debt into equity loan debt, and you aren’t able to make loan payments, you may lose your home to foreclosure..

In the best-case scenario, you’ll be able to “short sale” your home, which means you’ll fire-sale it for less than the amount you owe your lender. Even in this best-case scenario, but you’ll still lose your home.

Student loans are unsecured debts, meaning that they’re not guaranteed by any physical collateral like a car or house. If you default on your student loans, there’s a risk that your wages may be garnished or you’ll never see a tax refund. But your lender won’t go after your home.

If you transfer an unsecured debt (student loans) to a secured debt (a refinanced mortgage or home equity loan), your house is suddenly up-for-grabs.

You could end up with a higher interest rate than you started.

If you don’t fully understand the terms and conditions behind your home equity loan, you may unknowingly be shifting your debt into an account that could have an even higher interest rate than your student loan debt after the introductory period has ended.

Not all home equity loans have fixed interest rates and you could be setting yourself up for interest rate whiplash if you don’t pay attention to the fine print.

You won’t be eligible for student loan forgiveness programs.

If you make your student loan payments consistently, you may be eligible for a student loan debt forgiveness or cancellation program. Transforming your student debt into a home equity loan will immediately disqualify you for any sort of federal program to help pay it off. If you want to keep your options open for debt forgiveness or cancellation programs, never transfer your loans to a private loan, consolidate them with other debt, or trade it for a home-equity loan.

Expert Advice On Using Home Equity to Pay Off Student Loans

Financial guru Dave Ramsey considers home equity loans to be a con. In an interview with Bankrate, he stated paying off any other loan by transferring into a home equity loan is one of the biggest financial mistakes that people make.

Your home and your equity are your biggest financial assets, he explained. If you tap into that equity to pay off debt of any kind — whether its student loan debt, credit cards, or for debt consolidation — you’re essentially turning your biggest financial asset into your biggest liability.

If you shouldn’t take out a home equity loan, than what should you do to pay down your student debt? Here are a few tips:

1. Trim your expenses. Cut your spending as much as possible, rebuild your budget with the new numbers, and apply your savings to your highest interest-bearing student loan amount. Once that loan is paid off, continue paying that same amount towards the next balance, and so forth, until your loans are gone for good.

2. Start a side gig. Try working a part-time job from home or on the weekends by developing a “side hustle,” and use this extra income to more aggressively repay your student debts.

3. Create a plan. Develop a solid roadmap that will allow you to abolish your student loans for good – rather than just transferring them into a new name.

Don’t put your home on the line to just reshuffle your debt. It’s not worth it.

Paying Off Debt with a Home Equity Loan #MyHomeEquity

December 20, 2016

Debt, like many financial tools, is a double edged sword. As a student loan, it can be a low interest way to pay for school. As a credit card, it can give us financial flexibility, though at great cost if we don’t pay it off each month. A mortgage gives you the ability to buy a home without having to save up the money beforehand.

In all instances, there are positives and negatives.

When it comes to high interest debt, it’s crucial that you work towards paying it off as quickly as possible.

I’ve been fortunate to have avoided high interest credit card debt. I didn’t overspend on credit frivolously and I was lucky enough to not face financial hardships that force many to turn towards debt for necessities. Double digit interest rates on a debt, regardless of size, can be a big weight on your finances.

What if you could swap high interest debt for lower interest debt?

If you have enough equity in your home, it’s very possible.

Before we discuss the pros and cons, what to watch for, and other topics — the biggest question is if it’s even possible.

Do you have equity in your primary residence? Using Capital One’s quick calculator can help you find out.

Next, do you have enough debt? This may seem like a strange question but banks typically don’t give out small home equity loans. The smallest amount I’ve seen is around $10,000, but most banks have a minimum of $20,000 to $25,000. The debt doesn’t have to all be in one place, with a home equity loan you get the loan in a lump sum and can distribute it on your own.

Will you have the discipline to pay off this loan faster than you would’ve the original? Home equity loans can be for long periods of time, up to 30 years. A loan of 30 years at 6% will cost you, in interest, about as much as an 18% loan over 10 years. If you will be diligent about paying it off, shifting to a lower interest loan can be a good option.

What are the advantages? The biggest advantage is, obviously, a lower interest rate. This also means a lower monthly minimum payment. This can provide a tremendous amount of flexibility at a relatively low cost.

If you continue to make the old credit card payment amounts to your new lower interest home equity loan, you’ll be able to pay off your debt much faster.

Another advantage is that a home equity loan is a fixed rate loan – your interest rate will never change. Credit card interest rates fluctuate and that unpredictability can wreak havoc on your budget and financial plan.

Finally, the interest you pay on a home equity loan is potentially tax deductible. You can deduct interest on up to $100,000 of home equity debt when you itemize your deductions (subject to limitations based on income). Credit card interest is not tax deductible.

The one that jumps out at me is that if you shift unsecured debt, like a credit card, to a home equity loan, you’re shifting unsecured to secured. If you fail to pay a credit card debt, your credit score will suffer. By shifting that debt to something secured, the debt is backed by an asset (in this case your house).

The other drawbacks are associated with the behaviors that might have caused the debt in the first place. When you shift your debt to a lower interest rate, your monthly payments will go down. This will give you the illusion of greater purchasing power.

If you’re the type that will see the new lower monthly payment but still pay the original amount, fantastic! If you’re not and instead will just spend the money, or rack up more debt, on this now $0 balance credit card, then you’re only delaying the inevitable – and now putting your home on the line.

There are two things to keep an eye on — the closing costs (including an application fee) and whether there’s a pre-payment penalty. A home equity loan is very similar to a second mortgage so you’re getting a loan with a set period (up to 30 years) and most banks have a minimum amount, typically $10,000.

Capital One offers home equity loans with zero closing costs, no annual fees, and has loans for terms of 5, 10, 15, and 20 years. There is a pre-payment penalty if you close your account within 24 months, though there’s no pre-payment penalty for residents of Texas.

Many banks may charge application fees, closing costs, and other fees related to the loan because it is so similar to a mortgage. It’s not uncommon to see property or title related fees, so be sure to ask about these when doing your research.

What about other consolidation options

Using a home equity loan to pay off debt is not the only way to consolidate loans, but you will find that it’s probably going to be the cheapest.

At the time of this writing, I researched the cost of personal loans and quoted rates were much higher. This makes sense because a home equity loan is backed by your home, a personal loan is backed by nothing.

When you consider all the factors (fees, rates, tax deduction), a home equity loan is often the best option.

This post was fairly general and ultimately you will need to do the math to see whether it’s a good option for you.

Fortunately, there are plenty of tools available to you.

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