Using your home in debt consolidation is an effective way to get out of debt. According to reports, the home equity of Americans has grown by $636 billion in 2018. It is now worth $6 trillion. Obviously, this is a huge amount that can be used to eliminate high-interest credit accounts.
When we refer to high-interest debts, we are usually referring to credit card debts. We all know that almost every American owns a card. We do not have to cite a statistic for that. You can bet that the majority of wallets in the country has at least one credit card in it.
Unfortunately, our preference in using these cards does not immediately make us experts in using them. A lot of consumers have yet to understand the devastating effects of charging too much on their credit cards. This is the type of debt that can increase within a short amount of time. It can jeopardize whatever you have built in your net worth.
This is why you need to eliminate this debt immediately. If you own a house and you have enough equity on it, you can probably use it to consolidate your debts.
Why use your home equity in debt consolidation
There are two reasons why you should use your home equity to consolidate your multiple debts.
Lower interest rate
Using your home equity is one of the options to use secured debt consolidation as a way out of debt. A secured loan means you are borrowing against the value of the property. This is considered collateral for the loan. That means the lender will take the collateral from you in case you fail to pay off your loan. This payment guarantee will secure the interests of the lender and that will prompt them to give a low interest on this loan. If you plan to use this to consolidate your high-interest credit card debts, you can save a lot on the interest.
Interest is tax deductible
Another benefit of using home equity in debt consolidation can reflect in your taxes. You are borrowing against the value of your home. An interest rate on a loan will be considered tax deductible. According to reports, as long as it is no greater than $750,000, it can be tax deductible. This will help make the debt a lot cheaper than the alternatives. You can definitely use the savings to either pay your debts faster or give your savings a boost. Both will make your finances more secure.
How to use your home equity to consolidate debt
While debt consolidation through a home equity loan is effective, you need to ensure that you can follow through with the payments. Remember that consolidating debts is only a restructuring of your debts. It is meant to make your payments easier. But in as far as the actual payments go, you still have to go through all of that. Your debt still has to be paid by you.
This is why you need to be careful when using your home equity in debt consolidation. Remember that you are putting your house on the line. If you fail to pay for your loan, it might cost you the house that you bought. This is why you need to consider the following tips to ensure that you will be successful.
Borrow only what you need
To start with, make sure that you borrow only what you need. Even if the equity of your home is $200,000, if you only need $50,000, that is the amount that you should borrow. Do not borrow more because you will just be adding to your balance. Do not make your debts grow more than what it needs to.
Make sure you have a repayment plan
Another tip that you need to look into is a repayment plan. When you borrow the money, make sure you are ready with a plan to pay it back. You have to know what expenses you will cut back on to ensure that you can afford the payments.
Look at the expenses that you cannot live without. Mark these as your priority expenses. Anything else should be scrutinized to check if you can cut them off. You do not have to remove entertainment expenses completely – but make sure you are not overspending. There are ways to enjoy your hobbies without spending too much. And even your necessities can be made a little more frugal. Like eating out should be kept at a minimum to save money. As you make an effort to be smarter with your expenses, you should be able to put more funds into your repayment plan.
Do not add to your debts
Finally, you have to keep a tight lid on your debts. If you want to pay off the consolidated debt faster, stop adding to it. You do not have to close your credit card accounts. But if you own more than one, you might want to scrutinize every account and see which ones you really use. If there are cards that you do not use, feel free to close them. But ideally, keep the older ones open. Any card account that remains open should be kept for now. This will keep you from using them. Once you have paid off your debt consolidation loan, you can continue using your cards. But this time, make sure that you will use it wisely.