Should you use a home equity loan for debt consolidation?

Home equity loans allow you to convert part of the equity in your home to cash. It can be used to eliminate high-interest credit card and loan balances sooner. Home equity loans have lower interest rates than credit cards.

There is risk with these loans. If you fall behind on payments, your house could be foreclosed. Do you want to consolidate your debt with a home equity loan or not?

Home equity loans and home equity lines of credit have low interest rates, making them a good option for homeowners who want to save money on their high-interest debts.

"Borrowers who are serious about paying off their debt should consider a home equity loan for debt consolidation." If a consumer has a significant amount of equity in their home, has the discipline to stay within their means when it comes to borrowing and has sound financial health, it is an advantage.

If you aren't responsible with debt management or repayment, you shouldn't use home equity to consolidate debt. If you don't pay your home equity loan on time, your home could be at risk of being foreclosed. Before you take on another loan, you need to address the root cause of your debt.

Pros of using home equity for debt consolidation

Home equity can be used for debt consolidation.

One streamlined payment

Home equity can be used to consolidate debt.

Joseph Toms says many people have a hard time juggling multiple bills and making sure they are paid on time. It is possible to have just one payment to take care of in order to ease the stress and ensure on-time payment.

Lower interest rate

Home equity loans come with a lower interest rate than other types of loans since your home serves as a security. It is cheaper to pay off debt with a home equity loan than it is with a credit card.

Lower monthly payments

If you use a home equity loan for debt consolidation, you will likely have a lower interest rate and a longer loan term. The money you save each month could be what you need to get out of debt.

Cons of using home equity for debt consolidation

Home equity loan for debt consolidation is not the best option for everyone.

Your home serves as a security for a home equity loan. Your lender could take possession of your home if you default on your home equity loan. You may want to look for other ways to consolidate debt if you are having trouble making your payments.

Increased debt load

It is only helpful if you limit the spending that caused the debt to accumulate in the first place. If you accumulate more credit card debt, it will make your debt worse. You will have to make payments on your home equity loan and credit card.

Possible fees

Since the current value of your home is used to determine how much you can borrow, you may need to pay for an appraisal. It is possible that you are on the hook for closing costs. It is wise to compare the fees you will have to pay with the amount you will save in interest if you consolidate.

How do I get a home equity loan for debt consolidation?

The process for applying for a home equity loan is the same as the process for applying for a mortgage It's generally involved.

• Getting a preapproval to gauge your borrowing power
• Completing a formal loan application
• Submitting income and employment information, along with any additional documents the underwriter needs to process the loan application
• Having your home appraised
• Reviewing and signing the closing documents
• Receiving the loan proceeds (home equity loan)

It could take up to 60 days for the process to be completed. The lender can often consolidate the debt into a new home equity loan at closing.

Do you need good credit to get a home equity loan?

If you have a lower score or bad credit, you may be able to get a home equity loan even if you don't have a credit score. It is assumed that you have adequate equity in your home and a lower debt to income ratio. If you want a home equity loan to consolidate debt, you might not be able to afford it.

Other ways to consolidate debt

A home equity loan isn't the only option. All of your options should be compared before you make a decision.

• Personal loans: Even though personal loans carry higher interest rates than home equity loans, they don’t carry the weight of your home with them. If an emergency comes up and you can’t make payments, you won’t lose your home through a personal loan.
• Balance transfer credit cards: If the majority of your debt is through credit cards, you can transfer your balances to a 0 percent APR balance transfer credit card. These offers are typically temporary, but they might give you enough time to move your balances over and pay them off without the extra interest costs. Keep in mind that not all card issuers will approve your full balance; if you have lots of debt, you may still have to pay off some of your old cards with interest.
• Debt management plans: Nonprofit credit counseling agencies can work with you to create a plan that’s best for your finances. It will negotiate your rate and payment with lenders so you can get on a plan that won’t put you in a financial bind. You’ll make one monthly payment to the counseling agency, and then it’ll pay your debt off for you.

How do I get started?

If you decide that a home equity loan is your best option for debt consolidation, you need to compare offers, rates and terms. If you can't get better terms or a lower interest rate than what you have on your debt, look at what other lenders offer. It is possible to set your finances up for a more secure future by having a plan for how you will attack high-interest debt.

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