Owning a home is one of the best things since it offers emotional and financial security. However, being a homeowner comes with several responsibilities. You have to incur many expenses, including paying property taxes, mortgage and high-interest debts like credit cards.
Fortunately, you can solve these issues with the help of a home equity loan. Here is everything you need to know about using a home equity loan for debt consolidation.
What is a Home Equity Loan?
A home equity loan, sometimes known as a second mortgage, is the difference between your mortgage debt and how much it’s worth, which is usually based on the current assessed value.
For example, if your house is worth $300,00 and you have a mortgage debt of $ 120,000, you have a home equity of $120,000.
When you apply for a home equity loan, the lender allows you to borrow against the value of your home equity. Typically, most lenders let you borrow an amount less than your equity. Using the example above, your lender may allow you to borrow $90,000.
After approving your loan, the lender will give you the whole amount at once and then allow you to pay monthly installments for five to 20 years. You can use the money to pay various debts, such as credit card debts. You can also use it to cater to other expenses like college fees, home improvement expenses, or even emergency expenses.
How to Get a Home Equity Loan
Most credit unions, banks, and online lenders offer home equity loans. Here are the steps to follow.
Determine Whether a Home Equity Loan is Better for You
Different loans are suitable for different situations. Therefore, you should analyze your situation carefully before borrowing. A home equity loan is the best option if you are borrowing to offset your credit card debt.
Compare Options from Various Lenders
Lenders normally offer different terms for loans. To get the best deal, compare options from various lenders. If you are looking for a loan with better terms, consider Achieve loans.
Submit an Application
You must submit an application when you want to borrow any type of loan, including a home equity loan. Here, you’ll produce several documents, including proof of residency, identity verification, proof of income, and asset documents.
Await an Appraisal
Before getting a home equity loan, the lender has to evaluate your home to determine its current worth.
Closing on the Loan
Closing on the loan is the last step before you get your money. Generally, it takes about two to six weeks to close a home equity loan.
Pros and Cons of Using Home Equity Loan for Debt Consolidation
Using a home equity loan for debt consolidation offers different advantages and disadvantages, as discussed below.
Lower interest rates – Home equity loans have a lower interest rate than credit cards. Therefore, lowering credit card payments with a home equity loan is the best option.
Easy access to financing – Qualifying for a home equity loan is much easier than other types of loans. This is because your home is the collateral.
Potential for a tax deduction – According to IRS, interest on home equity loans may be tax deductible, provided you use the loan to buy, build or improve your home.
You may lose your home – Your home is the collateral for a home equity loan. You may lose your home if you fail to pay the loan due to financial challenges.
Your home could fall underwater – Since a home equity loan depends on the value of your home, there’s a risk that your home could fall underwater. When your property is underwater, it means that your debt is more than your home’s value. This normally happens when the value of your home drops due to market fluctuations.
There could be more costs – Before getting a home equity loan, you’ll have to pay some expenses. For instance, you’ll have to pay for a professional appraisal. Additionally, you may pay loan closing costs.
There are many options that you can choose for debt consolidation. However, if you are looking for the best option, consider a home equity loan. Applying for this type of loan is easy, and its interest loan is relatively low.