Home Equity Loan for Debt Consolidation

Are you considering a home equity loan for debt consolidation? Learn the pros and cons and compare it to other debt consolidating options for homeowners.  Like many Americans, you may be wondering if a home equity loan for debt consolidation is a good idea.

What Are the Best Home Equity Loans for Debt Consolidation?

• Home Equity Loans Provide Opportunities to Consolidate High Interest Debt
• Lower Monthly Payment Possibilities with Fixed Rate Home Equity Loans
• Fixed Rate HELOCs for Credit Card Debt Consolidation

Debt in the country is at an all-time high, with a whopping $17.5 trillion in the last quarter.

And an eyebrow-raising $1.13 trillion of that is credit card debt. No one wants to have multiple expensive debts on their shoulders, so it’s only natural to find ways to consolidate them. A home equity loan may just be a viable solution for that.

In this article, I’ll discuss how to leverage your home equity to pay off debt, who may be able to benefit from it, and the pitfalls to look out for.

Why Are Home Equity Loans Used to Consolidate Debt so Frequently?

There Are Many Good Reasons to Consolidate Debt with a Home Equity Loan.

Potential interest savings: HELOC loans often offer variable interest rates, which may be lower than rates on other debts like credit cards. By consolidating your high interest debt with an equity loan or HELOC, you could potentially reduce the overall interest you’re paying.

Streamlined payments: Consolidating debt with a home equity loan means you’ll have fewer monthly payments to manage. Instead of juggling multiple bills, you’ll only need to focus on repaying your equity loan. This simplifies your finances, reduces the risk of missing payments, and helps you avoid associated fees.

Homeowners have a special opportunity to maximize their financial state by utilizing their real estate to take out a home equity loan to consolidate high interest credit card debt and adjustable rate loans.

In many cases, borrowers can reduce their monthly payments with a debt consolidation home equity loan because the interest rates are usually lower and terms are more flexible as well.

A home equity loan is a second mortgage that homeowners can take out with its own terms. These unique debt consolidation loans typically have a fixed interest rate.

In simpler terms, you borrow a lump sum from your home, which you can use for anything. Such equity loans have a lower fixed interest rate than, say, credit cards because they’re secured by your home. Normally, a home equity loan is the difference between what you’ve already paid on your home and what’s left, that is, the mortgage balance.

More importantly, it depends on the value of your home, so an appraisal is a part of the process. You may qualify for a generous equity loan if the housing market is healthy and experiencing a boom. The RefiGuide will help you shop the best home equity loans for debt consolidation so you can reduce your interest and maximize your savings.

How to Accomplish Debt Consolidation with a Home Equity Loan

Home equity loans offer a large lump sum that you can use to pay off other debts, such as credit card or personal loans, particularly those with a high-interest rate.

Instead of paying all those debts separately each month, you have a single debt payment (besides the original mortgage), ideally at a comparatively low-interest rate.

The process of applying for a home equity loan is fairly simple.

Once you’ve chosen a lender who offers home equity loans, you can complete an application and begin the process.

They’ll start by checking your credit score and analyzing your income. They’ll also appraise your home to determine its current market value and offer you a loan based on that value and your equity in it.

If you’re using a home equity loan to pay off debt, the lender will consider the debts you want to bundle, such as auto finance or student loans.

Once approved, they’ll clear those loans, and you’ll no longer need to make monthly payments.

Based on the terms, you’ll now make monthly payments on the home equity loan. Homeowners in the U.S. have been taking out second mortgages to consolidate debt to save money with more favorable interest rates.

Pros and Cons of Home Equity Debt Consolidation

On paper, a home equity loan seems a good option to consolidate debt. But like any other financial instrument, this type of loan also has some drawbacks.

Let’s look at the advantages in more detail:

Pros

Lower Interest Rates 

The most attractive feature of a home equity loan is its low-interest rate. Historically, home equity loans have had comparatively lower rates even during times of rate increase. This is mainly because it’s a secured loan, where your home is collateral.

If you do the math, the lower interest may result in a lower overall debt payment, especially if you currently have debts with high rates. Remember that the home equity interest rate would also depend on other factors, such as your credit history and current rates. However, home equity loans offer a lower fixed interest rate when compared head-to-head with other forms of debt.

Fixed Rates with Home Equity Loans

Another advantage of home equity loans is that they have a fixed rate. In comparison, home equity lines of credit (HELOCs) typically have variable rates. You can use HELOC to pay off debt, but you may not get a fixed rate. The fixed interest rate equity loan ensures that your payments are fixed, and you know exactly how much you owe and how long you have to pay it off.

Single Payment

If you’ve taken on multiple debts, you’re probably already familiar with the nightmare of managing monthly payments. Making various payments throughout the month can be quite a hassle, and missing them can impact your creditworthiness.

All of that hassle can be avoided by consolidating the debt with a home equity loan and making one payment every month. This can help ensure you don’t miss a payment and get a hit on your credit score.

Lower Monthly Payments

If the rate is low compared to your other debts and the term generous, you’ll make lower monthly payments than you’re right now. This depends on your blended rate, a combination of your first and second mortgage rates. Lower monthly payments mean more money in your pocket to spend on essentials, save, or invest.

Cons

Your Home is at Risk

Your home is the collateral in a home equity loan, which means that if you default on this loan, you risk foreclosure. Everything will be fine if your income is ample and steady and you’re on schedule with the payments.

Still, you have to consider the enormity of the risk when taking such a route for debt consolidation. Also, you have to pay the entire loan should you decide to sell your home.

Various Fee

There are various costs associated with a home equity loan that you need to pay. These may include an origination fee, credit check, or home appraisal fee. These closing costs are typically required in the beginning, but if you’re in a tough financial position, they may be an added burden.

On top of that, you can’t benefit from home equity loan tax deductions if you use it for debt consolidation.

Home Value Drop

The real estate market is unpredictable, and your property’s value may drop below the number you used to secure a home equity loan.

In other words, you may owe more than your property’s value. This is normally not a concern if you plan to own your property for long.

The Alternatives to Home Equity Loan for Debt Consolidation

While a home equity loan is an attractive option for consolidating high interest debt, it may not be the right move for everyone. Also, not everyone may be able to avail one.

Here are some other alternative ways to consolidate your debt:

Cash Out Refinance

If your first interest rate is higher than the current interest rates, it may be wise to to consider a cash out refinance to consolidate debt and lower your mortgage rate. Discuss your situation with several lenders that offer both cash out refinancing and home equity loans so you can make a prudent financial decision.  It makes sense to evaluate the refinance mortgage and debt consolidation because you can save money.

Personal Loan

Personal loans can also be used to consolidate debt and pay off collections. Regarding home equity loan versus personal loan for debt consolidation, the latter carries a comparatively higher interest rate.

That said, you don’t need to secure the loan with your home. You may not necessarily lose your home if you default on a personal loan. The interest rate and loan terms of personal loans depend on your credit score and history. So, if you have a good credit score, you may be eligible for a decent rate.

Balance Transfer Credit Cards

Some credit card issuers offer zero APR, typically for the first year, if you roll over your existing credit card balance. This option can pay the principal balance on your credit card debts. If you can pay off the entire principal amount, you can pay off the debt quickly.

There’s usually a balance transfer fee ranging from two to five percent. You can use such cards to refinance credit card debt in under 18 months, This is a viable option for those with ample income or savings to pay off the principal amount they borrowed using credit cards.

Debt Management Plan

Credit counseling agencies offer debt management plans for individuals with a lot of debt. They negotiate with lenders to get better rates and flexible terms and put you on a plan for a single monthly payment. Some of these agencies are nonprofits that work with people with financial difficulties or bad credit.

What to Remember When Consolidating Debt with a Home Equity Loan

A home equity loan can be a feasible way to consolidate debt, especially those with high rates like credit cards, unsecured personal loans, or medical bills.

While there’s the risk of losing your home, if your income stays stable and your finances are in order, you can take advantage of the favorable conditions of a home equity loan to pay off your existing debt.

Not all home equity lenders are created equal, so if you do not have perfect credit and tons of equity, you may benefit from shopping equity loans to consolidate debt from the RefiGuide.

FAQ on Home Equity Loans for Debt Consolidation and More

What is the difference between a home equity loan and HELOC?

A home equity loan lets homeowners borrow a lump sum amount secured by their home at a fixed rate. A HELOC opens a line of credit with fluctuating rates so homeowners can borrow cash as needed.

Is a home equity loan better than credit card debt?

People ask us all the time, “Is a home equity loan good for debt consolidation​?” Homeowners have been taking out equity loans to consolidate high interest debts for decades. It makes sense to trade in compounding interest for a simple interest loan with lower fixed monthly payments.

Home equity loans generally offer lower rates and flexible repayment terms. In comparison, credit cards have higher rates and can accrue much interest if you fail to pay the debt. Home equity loans typically have closing costs and most credit cards do not. So, if you are only borrowing a small amount to consolidate debt, sometimes a credit card make more sense, even if the interest rates are higher.

Is a HELOC a good idea for debt consolidation​?

The HELOC loan is considered good option for debt consolidation because it allows you to access only the amount you need, rather than the full line of credit. However since a home equity line of credit typically featuring a variable interest rate and an equity loan has a fixed interest rate, it makes more sense to take out a home equity loan to consolidate debt. Unless of course you need money for multiple purposes. For example, if you want to consolidate $30,000 for credit card and another $40,000 for home remodeling but you aren’t sure when you will need the funds for home improvements. In this case, the HELOC line of credit makes sense because you’ll only pay interest on the funds you actually use, not the total credit available. It may be difficult to increase the HELOC limit, so make sure you ask for enough the first time.

Can I refinance a mortgage ad consolidate debt?

Yes, if you would rather not take out a 2nd mortgage to consolidate debt you can get a cash out mortgage refinance and use the funds from the new loan for debt consolidation. Of course you need to verify that home refinancing still saves you money  after extending your term again.

How long does it take to get a home equity loan?

The time it takes to get a home equity loan depends on the lender’s process. Generally, you can expect to get the loan approved in at least two weeks.

Refinancing debts through a home equity loan presents various potential benefits, such as reduced interest rates, streamlined payments, and possible tax advantages. The RefiGuide will help you understand the benefits and requirements so you can shop for a competitive home equity loan that maximizes your monthly savings.

What is the Debt to Income Ratio requirement for home equity loans?

Most 2nd mortgage lenders require a Debt-to-Income ratio (DTI) not higher than 43% to qualify for a home equity loan, meaning your monthly debt obligations should not surpass 43% of your gross monthly income. However, there are a few lenders that approve equity loans with higher DTI requirements. If your debt to income ratio is above 43%, consider a non QM or private lender that allows home equity loans for borrowers up to 50%.

Who can get a home equity loan?

Of course, you must have equity in your home to qualify for a home equity loan, and typically the minimum requirement is 15 percent. The more equity you have, the bigger the loan you may be able to get.

In addition to the equity in your home, you’d also need a good credit score. You’re taking on a second loan, basically a second lien on your home, so you should be able to demonstrate that you’ll be able to pay it off.

For instance, Rocket Mortgage requires a minimum credit score of 680, which isn’t very high per se but definitely not low either. The RefiGuide can help you find lenders that specialize in home equity loans for people with below-average credit if needed.

Getting approved for a home equity loan typically demands a stronger credit profile. To qualify, you must prove to the lending underwriter your capacity to repay the 2nd mortgage.

However, the procedure for obtaining one is generally straightforward. Initiate by contacting a lender specializing in home equity loans or HELOCs. Following this, you’ll submit your application for the home equity loan, which the lender will likely scrutinize, particularly focusing on your income and credit score. Additionally, it is highly  likely that the lender conducts a home appraisal.

Take a few minutes and get a free quote from top lenders, so you can shop home equity loans to consolidate high interest debt and much more.

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