For various reasons many people in America have found themselves drowning in credit card debt. They may have lost their jobs, got involved in a bad relationship with someone that ran up their credit, or for one of many other reasons find themselves with more credit card debt than they can handle. This usually results in using another card to pay another card or picking and choosing which payments get made long enough to hold off your creditors. Lots of people in the past have turned to bankruptcy thinking it was their only way out, but another viable solution could be a home equity loan.
What is a Home Equity Loan?
It is a type of loan where the borrower uses the equity they have built up in their home as collateral for a loan from a bank or other lending institution. The amount of a loan you qualify for is generally the difference between the current fair market value (FMV) of your home and the amount that you currently owe on it with your primary mortgage lender.
It is similar to a second mortgage where a borrower is charged a fixed rate of interest for a term of usually 10 to 15 years. It is generally used to finance major expenses such as house repairs, medical bills, or any kind of property improvement. However, over the past few years, it has been used more frequently to pay off credit card debts.
The fixed interest rate to be paid on such loans is generally much lower than your credit card interest rate. This is good because it eliminates any risk associated with your credit card company changing your rate. However, it does create a lien against your property and lower your total available home equity meaning you can’t use that equity for anything else that might come up.
Guidelines to Follow While Using Home Equity Loan to Pay Off Credit Card Debt
Reduced Interest Rate
The rate of interest on the home equity loan should be lower than the interest charged by your credit card companies. . If for some reason the interest rate is higher on the home equity loan (which is doubtful) then you should obviously continue paying your credit card company and avoid the home equity loan.
Home equity loans are generally preferred over home equity lines of credit. Although the latter provides better flexibility where you can draw money out as needed, it has a drawback in that the line of credit usually has a higher interest rate. The overall aim is to reduce your debt and that means getting the lowest rate possible.
Squaring Off Debts
Ideally if you take out your home equity loan it is best to have your lender directly pay your debts out of the loan proceeds. If they refuse to do that or simply cannot for whatever reason then make sure you promptly pay off your cards to avoid any additional interest accruing and to make sure you actually get all the debts paid.
Change Your Ways
The next step in the process after paying off your credit cards with a home equity loan is to start living as much as possible without the use of credit. To the greatest extent possible you want to save and pay cash for everything you can. The last thing you want to do is find yourself back in heavy credit card debt with no or little equity left in your home to borrow against.
Take Credit Very Seriously
As discussed, a home equity loan is a secured loan and your house is the collateral. If you don’t take credit cards very seriously and get yourself back into a jam, you are much more likely to lose your home. Therefore, take credit in general very seriously going forward and try to avoid getting back into a financial crisis.
Ken Myers is a father, husband, and entrepreneur. He has combined his passion for helping families find in-home care with his experience to build a business. Learn more about him by visiting @KenneyMyers on Twitter.