You certainly can use your home equity loan to renovate or repair your home. In fact, that’s how such loans came about. But there’s no rule that says you can’t use your loan for other things, including paying off obligations. In fact, it could be a good idea to do so. With that in mind, here’s what you should know about using home loans to reduce high-interest debt.
Explain Home Equity Loan
Taking out a home equity loan meansyou’re borrowing cash against the equity you have built up in it.Equity is the difference between your home’s market value and how much is owed on your mortgage. For example, if the market value of your house is $200,000 and you have a $100,000 balance, you have $100,000 in equity.
Why are Home Equity Loans Advantageous?
A chief benefit is that the loans have fixed rates, relieving you of concern about fluctuations. What’s more, your payment amount is the same each month.
Also, you can pay for big purchases over time — not all at once — and your interest rate will be among the lowest out there – for sure lower than what your credit cards carry. Do note, though, that your ultimate rate will hinge on your income and credit reports.
Another benefit is that, following approval, your loan can usually be processed fast, frequently within days. In addition, you likely can deduct the interest you pay on your loan when the tax man cometh.
Uses for a Home Equity Loan
While there are lots of possible uses for home equity loans, understandthat, however you use one, your home is attached as collateral. So, be sure you can make payments before you pursue such a loan. Otherwise, you very well could lose your home.
Using Your Loan to Reduce High-Interest Debt
Credit cards generally have high interest rates, at least relative to most loans. Because home loans typically have low rates, such loans can be used to consolidate debts at a lower interest rate. For example, you could erase balances on an 18% APR credit card by using a 4% APR home equity loan.
These loans are best suited for people who have substantial equity in their homes – at least 15 to 20% — and for those who have the discipline to remain within their means in terms of borrowing. Achieve, by the way, offers such loans at the best rates available.
What Are the Advantages of Using Home Equity to Pay Off Debts?
For one thing, you only must worry about one monthly payment. This is a big benefit for those who tend to get lost in the onslaught of monthly bills, with all their varying amounts and due dates. Having a single payment can mitigate stress, simplify your life, and increase the odds that your monthly payments will be timely.
Then there’s the lower interest rate. Because your home is attached as collateral, such loans generally have lower rates than other loans. If you have balances on credit cards, student loans, a personal loan, or other debts, using a home equity loan for consolidation could make it less expensive to erase those balances. Ultimately, what a lower interest rate means to you is less overall interest paid over the course of the loan.
Further, debt consolidation with a home equity loan means a lower monthly payment. Why? Because you will likely have a lower rate and a longer time with which to make payments. If your budget is tight, lower monthly payments can render paying off debt more reasonable.
Ultimately, reducing high-interest debt is imminently possible with a home equity loan. In fact, it’s a great idea – as long as you know you’ll make payments.