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How To Consolidate Debt Using Your Home’s Equity ”
No one wants to be stuck with a mortgage loan for years. Borrowers often look for quicker methods to pay off their loans. Generally, borrowers do not have a choice in this matter. However, if your house’s value rises over the years, you may get an early way out of your debt.
The increased market value of your house gives you access to a huge amount of cash through home equity loans. While this does sound like a lucrative offer, there are a few more things you need to consider before you jump in.
To help you learn more about this, we have created a detailed guide on how you can use your home’s equity to consolidate your debt. Meanwhile, if you are looking for a debt consolidation loan in London, you can learn more here.
What Is Debt Consolidation?
Most people see managing multiple loans as an unwanted hassle. Debt consolidation is the process of taking one single loan to pay off all the other small debts. Usually, these loans have lower interest rates and favorable payoff terms.
Once all your debts are paid off, you can focus on one single loan (until that’s paid off too). Depending on the lender, you might also get lower monthly installments along with lower interest rates. This powerful combination will make the repayment process seamless for you.
What Is A Home Equity Loan?
Also known as second mortgage loans, home equity loans allow owners to take a loan against the equity of their house. Here, equity is the difference between the house’s current value and the owner’s remaining mortgage balance.
Generally, your lender will evaluate your ability to pay off the debt before sanctioning it. They might even enquire about the purpose behind the loan before they proceed. Your current income and credit score will also play a major role in deciding the maximum amount that you can borrow.
Usually, you will easily get a loan from your bank, credit car company, or credit union. It’s advisable you approach the institution where you have a good payment history. This will not only qualify you for better interest rates but you will also receive great service.
The reason why it’s easier to get loans against your home’s equity is that with an asset at stake, you are more likely to return the debt. And even if you don’t they can always get their money back using your asset.
How Exactly Does It Work
Now that you know about debt consolidation and home equity, it’s time to connect the dots. The first step here is to calculate how much cash you will need to clear all your debts at once. Once that is done, you need to consult a lender and discuss a loan option against your home’s equity. If you are deemed eligible, then using this new loan, you can pay off the other smaller loans.
And now since all your debts have been replaced by one single loan, we can say that your debt has been consolidated using your home’s equity.
Pros Of Using Your Home’s Equity To Consolidate Your Debt
Debt consolidation using your home’s equity comes with its own set of risks. Hence it is important for you to consider the pros and cons of this move before jumping into it.
Here are some factors that weigh in the favor of this scheme:
Any borrower would prefer loans at low interest rates. If you are using your home’s equity to get your debts consolidated, you will qualify for a comparatively lower interest rate. The reason behind this is that the risk that your lender is taking in this scenario is negligible. Interest rates increase with risk, but when the loan is secured by a house, the probability of the loan being repaid increases and the risk goes down.
Lower Monthly Installments
Low-interest rates and monthly installments are co-related. If the interest rate decreases, you will obviously be paying lower installments each month for a fixed tenure. This will take the financial burden off your shoulder during your repayment tenure.
The interest you pay on your home equity loan might be tax-deductible. This means that it will reduce the amount of your taxable income and you will save on income tax. However, you might need to show that you have invested that loan amount in building, remodeling, or buying a property.
However, If you use this loan to pay off your credit card bill or your student loan then you would not qualify for a tax deduction
Your Debts Are Easier To Manage
It’s worth mentioning that debt consolidation will make managing your finances easier for you. With only one loan and one monthly installment to care about, you can cater to the other aspects of your finances better.
Things To Keep In Mind
Here are a few things you need to be wary of before choosing to consolidate your debt using your home’s equity.
You Can Lose Your Home
The biggest disadvantage of this type of loan is that if you fail to repay on time, you can end up losing your home. In secured loans, the asset you take the loan against stands as a guarantee of repayment. But if you fail, your lender has the right to liquidate the asset to get their payment. In this case, the asset is your house.
Market Drop Can Drown You In Debt
The entire foundation of consolidating your debts using your home’s equity is dependent on the value of your property. But if you are unlucky and the real estate market collapses like the housing crisis in 2008, you will end up in a debt worth much more than your house.
It is not a bad idea to consolidate your debts using your home’s equity, but when a lot is at stake, it’s better to think it through. To be on the safer side, sketch out a repayment method before you apply for the loan. This will ensure that no matter what goes wrong, you are able to pay off your debt on time. After all, it takes a huge chunk of your entire life’s income to build a house. It’s certainly not worth losing it over a loan.
How To Consolidate Debt Using Your Home’s Equity