Use your home equity to pay off debts

Credit cards can be so convenient. They eliminate the need to carry cash, they allow you to order items online, and sometimes using them qualifies you for special discounts. As long as you pay them off every month, they’re great. But the problem is that so few of us do that. Credit cards are so easy to use that we rack up more debt than we intend to and only pay the minimum. Then, before we know it, you’re in over your head.

If you’re up to your eyeballs in credit card debt, you may be searching for a way out of your situation. But if you’re assuming that one debt is just like another, you’re mistaken. Let’s say you have a choice of owing $50,000 worth of credit card debt or having a $50,000 mortgage on your home. The total owed is the same. But the amount you’ll pay over time is much different!

What makes the difference, of course, is the interest the lender charges. Since credit cards are unsecured, credit card companies charge a much higher interest rate than a mortgage lender. Because of that difference, using a home equity loan to pay off your high-interest credit cards can actually be a smart move.

There are several options to look at if you’re considering using your home equity to pay off debt. You could use a Home Equity Line of Credit, arrange equity refinance, or take out a second mortgage on your primary home. Naturally, it’s necessary that you have sufficient equity in your home for these options to be feasible. The lender you choose to work with will require an appraisal of your home to help make this determination.

The equity in your home is the difference between the appraised value of your home, and what you owe on it. But in a mortgage refinance, you’re restricted by the lender’s loan-to-value tolerance; which has to do with how much risk the lender feels comfortable taking at any given time. Usually, the equity payout will be 90% or less of your home’s appraised value. So your available equity will be the difference between your current mortgage balance and 80%-90% of the home’s appraised value.

Finding out whether you’re eligible to use your home equity to pay off debts begins this way. Your current debts (both the totals and the monthly payments) will be listed. Then the value of your home will be considered, to make sure that it’s a candidate for a new mortgage. Then the lender will work with you to determine if exchanging unsecured debt for a home equity loan is a wise decision.

Use your own judgment, as well, to confirm that your budget can withstand the costs and payments that will be a part of your refinance. If you are not sure, a qualified financial planner or credit counselor will be able to assist you.