Consolidating debt is one of the best ways to pay it down quickly, especially if you have a lot of unsecured, high-interest debt. With their lower rates and longer repayment terms, a home equity loan can help you become debt free. Let’s look at some of the pros and cons of using a home equity loan to consolidate debt.
Your home can be one of your most important assets. The more equity you have, the more cash you have access to through loans or lines of credit. Here are a few reasons using a home equity loan to consolidate debt is a smart move:
- One payment – When you consolidate debt using your home equity, you can simplify your life by having one streamlined payment rather than multiple payments to manage each month. This also reduces the odds of missing a payment.
- Lower interest rate – A home equity loan usually has a lower interest rate than other types of personal loans or credit cards since your home is collateral for the loan. If you have a large amount of unsecured credit card debt, it could take you a very long time to make substantial progress on the balances due to the higher interest rates.
- Lower monthly payments – The lower interest rate and longer terms of a home equity loan usually means a lower monthly payment. This is important to anyone who is on a tight monthly budget. If you can make your money go farther each month, you can start to get out of debt and stay that way!
Using a home equity loan to get out of debt may not be the best choice for everyone. Here are few reasons why:
- Your home is collateral – With a home equity loan, your home secures the loan. This means that if you default on the home equity loan, you could lose your home. If you’re having trouble making existing payments, you may want to explore other ways to get out of debt.
- Increased debt load – While a home equity loan can help you get out of debt, you will have to be disciplined and limit the amount of spending that caused the debt to pile up in the first place. The last thing you want is to end up back where you started.
- Possible fees – Home equity loans require an appraisal to determine the current value of your home. Because it is also a second mortgage, you may need to pay closing costs as well. It’s a good idea to compare the costs involved with home equity loans to the amount of interest you’ll save to see if a home equity loan makes good financial sense before proceeding.
Baltimore County Employees Federal Credit Union offers a home equity line of credit and home equity loans with low rates and no closing costs.* Our experienced Loan Counselors can help you determine if using your home’s equity to consolidate debt is the best option for you.
*If loan is paid off within 24 months of the original note date, closing costs must be reimbursed to Credit Union by the borrower.