Debt Consolidation ;
Do you have considerable credit card debt, car loan, medical bills, or even student loans? Keeping your head above the water becomes hard when you are stuck in such debts. Faced with such, you might explore various options to get yourself debt free.
Consider consolidating all your debts to pay them faster, improve your credit score, get lower interest rates, or even reduce the stress of paying off multiple debts at multiple interest rates. But, what is debt consolidation, and should I consolidate?
What Is Debt Consolidation?
Debt consolidation is a financial strategy combining multiple high-interest debts into a single, lower-interest one. The idea is to reduce the burden of multiple monthly payments and interest charges by consolidating them into a single payment. This can be done by taking out a new loan or using a balance transfer credit card. This strategy will reorganize and reduce the total debt to ensure that you settle your debt faster.
There are many debt consolidation options, including debt consolidation loans, balance transfer credit cards, peer-to-peer loans, or even coming up with a debt management plan. But did you know that consolidating debt with home equity is also possible?
How Does Debt Consolidation Using Home Equity Loans Work?
Home equity is the difference between the mortgage balance and its current worth based on the present/current market value. Unless you’ve got some equity in your home, you can’t qualify for a home equity loan. Lenders typically require a minimum of 15% equity in the home before approving a home equity loan.
Home equity is directly proportional to the amount you pay to the lender. Hence, if you pay more, then the equity grows higher. The equity also increases when the overall property value in your locality is on the rise or the housing market is doing great.
A home equity loan allows you to borrow against your home’s equity in a single large installment loan. You can use the cash to consolidate your many debts. Debt Consolidation with home equity loans has several advantages and disadvantages, as we shall see below.
Advantages of Home Equity Loans
1. You will get a tax deduction:
If you have a home equity loan, you can write off part of the interest, especially in Alabama. However, you only can take the deduction if you use the money for home improvements. Hence, this option is more helpful than using balance transfer credit cards if you have plans to renovate your home.
2. Home equity loans accrue lower interests:
Compared to balance transfer credit cards and peer-to-peer loans, home equity loans often boast significantly lower interest rates. A prime example is home equity loans in BC, where you can borrow up to 75% of your home’s equity and secure much lower interest rates.
3. You will pay back in smaller installments:
Because of the reduced interest rates, you’ll pay lower monthly. You also will be making a single payment per month.
4. The credit scores might vary:
Because you will be borrowing on your home’s equity, you’ll not be required to have a high credit score to achieve loans. However, you should check with your lender because the scores might vary based on the loan product and lender requirements.
Disadvantages of A Home Equity Loan
1. The of your home could change:
Should your home’s value depreciate and you have used your home as equity, you might end up owing more than your home’s actual worth.
2. You will be putting up your home as collateral:
Consolidating debt with home equity means risking your home, that roof over your head. If you don’t repay the loan in time, your home may be repossessed, leaving you homeless.
There are many options when it comes to consolidating your debts. However, you must first determine the amount of money you owe, the amount of interest, the payment period, and the least risky payment method. Talk to your financial advisor to see whether home equity is the best option for paying off the debt. Are you okay with using your home as collateral? Y