One of the ways that you can consolidate debt is by using home equity loans. We all know that debt consolidation is a great repayment strategy. But there is more than one option for you to do this. You have to consider your specific debt and financial situation to determine which one you should use.
If you have a $300,000 mortgage and you already paid $100,000, that means your equity is currently $100,000. This equity represents the value of the house that is a part of your assets. This can go up as long as you keep on paying your loan or if the value of your house goes up. If you are borrowing against the equity of your house, that means you are borrowing the value of the house that you already own.
The truth about using your home’s equity in debt consolidation
Before you decide to borrow home equity loans for your multiple debts, you need to understand the pros and cons of using it.
There are two advantages of using the equity of your house in debt consolidation.
- You are borrowing your own money. Although you are borrowing from a lender, what really happens is more of a trade. You are trading the equity of your house for cash. That means every time you make a payment, you are increasing the equity of your house once more. It is like you are paying yourself back.
- You can get a lower interest. Since you are borrowing against the equity of your house, you are basically getting a secured loan. This collateral means the lender does not have to give you a high-interest rate to ensure that you are paying them back. If you fail to pay, they can just get your house. This allows them to give you a lower interest on the loan. If you are diligent in paying it back, it will save you a lot of money compared to borrowing a loan with a higher interest rate.
There are also two disadvantages to using home equity loans as a means to consolidate debt. Get to know them so you know what to avoid.
- You can lose your house. Since you are putting your house as collateral, your lender can foreclose on your house if you fail to make payments. They can use it in exchange for the payments that should have been sent for the loan you borrowed. This is why you have to be careful with your payments. You need to really commit to so you will not put your house in danger of foreclosure.
- You are probably compromising your retirement plans. This does not mean you are relying on your house to help you fund your retirement life. The issue here is the fact that it will take longer for you to get out of debt because you used the equity of your home. Instead of only paying a portion, you have to pay the whole thing again because you borrowed it from debt. Obviously, it is hard to retire with debt. According to reports, the average American wants to retire at the age of 66. If you keep on using the equity of your home, you might have to retire later than this.
When you are deciding to use home equity loans as your debt solution, make sure that you are completely aware of the pros and cons of using it. You have to understand what you can gain and what you can lose. It will help you stay committed to this debt relief program. Not only that, but it will also help you stay away from the mistakes that can compromise the success of your debt consolidation efforts.
How to succeed in using home equity loans
Now that you know the truth about home equity loans, it is not time to get the tips that will make it successful. It is not enough that you know about the realities that can dictate the success of your debt freedom. You have to make sure you are applying the right habits that will help you achieve your goal.
Here are some tips that will help you succeed in using home equity loans as a debt solution.
Do not add more debt
You should refrain from acquiring more debts when you recently took out a loan from your home’s equity. This can be very tempting since your credit cards do not have any balance. The urge to use it for purchases can be very strong. But we all know this is a bad idea.
For starters, this will only add up to your monthly financial obligation and could make it harder for you to meet your payments. You need to remember that if you fall behind on your house payments, your lender can exercise their lien on it and foreclose your property.
You need to be extra vigilant when you have just started a debt consolidation program. One of the pitfalls you need to look out is the false sense of available credit. You might think that after you have consolidated your credit card debt, you can start using them again. It is imperative that you exercise caution when adding debt once you enter a repayment program such as debt consolidation.
Do not include debts that are beyond the statute of limitations
Before you include a debt in your consolidation efforts, make sure it is no longer past the statute of limitations. You cannot be compelled to pay off accounts which are already beyond this. At least, you can no longer be sued for it. You can borrow a lesser amount on your home equity loans. The lesser you have to borrow, the less risk you will be putting on your home.
Do not falter at paying off your monthly dues
This should already be your top priority as soon as you took out a loan against the equity of your home. Never put your finances in a situation where you have to pay for penalties and interest simply because you failed to meet your payments. You have to make sure that your funds are sufficient to meet the monthly dues. This can easily be done by creating a budget plan that will guarantee the funds for your debt payments. Not only that, you should set up reminders a few days before the due date. Make a habit of paying days before the actual due date so the chances of you being late will be unlikely to happen.