Using a Home Equity Loan for Debt Consolidation
Homeowners who find that they have far too much debt, and don’t know how they’re going to pay it all off, may find the solution lying in a home equity loan. Using this type of loan, a person can borrow a large amount of money at one time by tapping into their home equity. They could then use that money to pay off all of their other debts, essentially consolidating all of that debt into just one loan that the homeowner pays to the mortgage lender.
Doing this has many advantages, but one of the main ones is that home equity loans generally have fairly low interest rates, and those rates will always be lower than those on credit cards, car loans, and many other types of debt. Interest rates on these types of loans are also fixed rates, so they’re an especially useful form of debt consolidation at times when the interest rates on mortgages are very low. And when a homeowner’s interest rate gets lowered by 15% by switching from high-interest to low-interest loans, it’s amazing how much easier it is to get out of debt!
Another advantage that comes with using a home equity loan for debt consolidation is that they are based mostly on the equity a person has in their home, not their credit score. People who are deeply in debt often find that their credit score suffers from it and so, are turned down for other types of loans. But because a home equity loan is using equity that you already have and that you already own, that’s generally all a lender needs for approval.
The amount a person will be able to borrow for their debt consolidation purposes will depend on how much home equity they currently hold. An easy way to determine home equity is to deduct the amount still owing on the mortgage from the value of the home; the resulting amount is how much home equity a person has in their home. Some lenders will lend up to 80% home equity, while most generally lend 70% – 75%. Borrowers are usually advised though, especially when they’re already in debt, that they should borrow no more than 50% of the equity they have in their home to ensure that they don’t take on more debt that they can actually handle.
Homeowners who are using a home equity loan as a form of debt consolidation are strongly encouraged not to take on large amounts of debt once they have paid off their existing debt, especially before they have paid off the home equity loan. With these types of loan, the home is used as collateral for the loan and so, the lender could foreclose on it should the homeowner default on the payments. While home equity loans are great solutions for debt consolidation, it should not become something that’s a rotating cycle.
Bryan J is the author of this article. For more information about Home equity loan Canada and Mortgage rates please visit canadianmortgagesinc.ca.
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