Accounting Article

Using Your Home Equity for Debt Consolidation Purposes

With today’s economy, many American households have more debt than they should, and much of that is high-interest credit card debt, which should be avoided in the first place. When you realize that you are struggling to just make the minimum payments each month on all of your cards, and that even then the balances seem to be going up, it is time to do something. If you own your own home, one of these easiest remedies to this problem may be a home equity loan. You use the equity that you have built up over the years to secure the funds you need to payoff those debts, saving money each month, cutting interest costs and fees, and getting your credit back on track once and for all. It will be much easier for you to pay one payment each month to your home equity lender than to pay five or more to various credit cards, all with different due dates.

Another nice benefit that you can get with your home equity loan that you can’t get with those high interest credit card debts is the ability to claim a tax deduction each year on the amount of interest you pay on the loan, which is kind of like getting out of debt interest free. Keep in mind; this deduction isn’t necessarily available to everyone who has a mortgage or home equity loan, so you should talk to your accountant or tax advisor first, before taking a loan solely for this purpose.

You have two choices when it comes to this type of loan, you can take a loan that has a revolving line of credit, called an open end loan, or you can take one that gives you the money in one big lump, called a closed end loan. Both have their own unique advantages, so you should take the time to decide which will best suit your needs.

If you go with a closed end loan, odds are your interest rate and monthly payment amount will remain the same for the length of the loan. You will be given a repayment term, typically depending on your credit and the amount of money you borrow, to have your loan completely paid in full. This type of loan allows you to know exactly how to plan your monthly budget, and know exactly how much more time you have left on the loan.

If you take an open end loan, you may be able to get a much lower interest rate, which typically may change every quarter, and your monthly minimum payments along with it. This can make it hard to plan out your budget, but can also save you some money in the long run. With this type of loan, your lender will set a maximum amount of money you can have, much like a limit on a credit card, and you can go back and get money as often as you need to, up to that amount. When you pay your balance down, you can go back and take out more funds, without having to take out another loan. Some lenders may limit you to a specific period of time to take out funds, for example, they may say that you can take funds as needed for the first five years, and then after that will have to pay off the balance before you can take more, etc. This policy varies from lender to lender. It is important that you make sure you fully understand your contract before agreeing to this type of loan.

It is typically a smart move to take a home equity loan and payoff your debt with it, as long as you are careful. You want to make sure you get a lower interest rate, and lower monthly payments, so that you really do get a good deal. Just keep in mind, that you could lose your home if you take too much or can’t afford your payments, so be careful about what you get into!