Home Banking & Insurance The Benefits of Using a Home Equity Loan for Debt Consolidation

The Benefits of Using a Home Equity Loan for Debt Consolidation

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The Benefits of Using a Home Equity Loan for Debt Consolidation

Equity is one of the most significant income sources for any homeowner. You can use your property’s worth as collateral to borrow a loan against it. To calculate your equity, you subtract what you owe on the mortgage from the house’s current market value. Most lenders offer about 80% to 85%of your home’s equity as a loan that you repay in equal monthly installments over a predetermined period. One popular way people use home equity funds is for debt consolidation. Let’s dive deeper into the benefits of using a home equity loan for debt. 

Lower Interest Rate

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If you have high-interest debts or those requiring large payments, you can use a home equity loan to consolidate them. Once a lender approves your loan, you receive all your money at once and can use it to repay your other debts. Though you will still have to pay your equity loan, you obtain a significantly lower interest than what you pay on your credit cards. For instance, you can take a 4% interest home equity loan to pay off an 18% credit debt. This means converting your high-interest loans into low interest, so you will pay less interest in the long run. 

High Borrowing Limit

Home equity makes it easier to obtain large sums of money to pay off your credit debts at once. The higher your equity, the higher the loan you can borrow. It isn’t easy to get such borrowing power from other avenues like personal loans. You can also access the funds quickly once you complete the loan documents. 

Improves Your Cash Flow

Large loan payment bills can significantly reduce your cash flow. So by eliminating high interest debt with home equity, you will see cash flow improvements each month. You can use this money to offset other bills or do other projects. 

Predictable Payments

The amount set for the equity loan at the beginning is what you pay until you clear the loan. When you obtain the loan, you know how much you should pay and the exact time you need to make payment, making it easier to plan and manage your budget. The fixed payment allows you to assess if you can afford the payments for the entire loan before you apply. 

Longer Loan Terms

A typical repayment for a home equity loan ranges from five to thirty years. A longer repayment period translates into a lower, more affordable monthly payment. You will never feel as if you are under pressure to pay the loan quickly.

Consolidating Several Debt Bills Into One

An average American has approximately $90,460 in debt, including personal loans, credit card debts, student loans, and personal loans. Most people find it hard to juggle paying multiple bills each month. Since a home equity loan consolidates your debts into one, this will make your life much easier. You no longer have to worry about multiple due dates, which will ensure that you pay your debt on time. 

Less Risk

The interest rates for a home equity loan are constant throughout the repayment period. This helps eliminate the risks associated with variable interest rates that may rise and fall, increasing the total cost of your loan. Lenders will rarely allow you to borrow 100% of your house equity. This makes the loan less risky since you will get less than the amount you have invested in the house, which helps ensure you can comfortably repay the loan. 

Pay Off Your Debt Faster

Since a larger portion of your home equity loan will go to debt payment, you could get off debt faster if you choose a shorter repayment plan. The low-interest rate also frees up cash you can use to settle unsecured debts.

Summing UP

A home equity loan is a smart financial move that makes it easier to quickly access large sums of money that you can use to eliminate high-interest credit cards and loan balances. The benefits of using a home equity loan for debt compared to personal loans and other debt consolidating options include lower interest rates and more borrowing power.