If you’ve accumulated some debt and are trying to find the most effective method of paying it off, a home equity loan might be just what you’re looking for. We’ll discuss how debt consolidation works and whether it’s the right choice for your financial situation.
What is a debt consolidation home loan?
With a debt consolidation home loan, you borrow money from the equity you’ve put into your home and use it to pay off certain debts. This is called “debt consolidation,” and it’s one of the most effective methods for helping people get out from under the burden of growing debt. Debt consolidation can be especially valuable if you currently owe a lot of money on high-interest credit cards since home refinancing loan interest rates are at an all-time low.
How it works
Debt consolidation is the process of taking out a new loan to pay off several or all of your smaller, unsecured debts, including:
- Medical bills
- Credit cards
- Payday loans
- Unsecured lines of credit
- Income tax debt
- Overdue bills
Because you build equity in your home with every mortgage payment you make, you can use it to help get your finances in order. How much you can borrow will depend on how much equity you have in your home.
Let’s look at an example:
If you took out your original mortgage seven years ago for $300,000 and today the current amount owing on your mortgage is $200,000, then you have $100,000 in home equity. In this scenario, you could potentially borrow up to $40,000 from your home to consolidate and pay off debt since debt consolidation loans typically have a cap on how much you can borrow against your home’s value.
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Benefits of a debt consolidation home loan?
While the benefits of a debt consolidation home loan will vary from person to person, there are some general advantages everyone can benefit from.
Your interest rates are lower with a home loan
When you take out a debt consolidation home loan, you get lower rates than what you're currently paying for two main reasons: current market interest rates are at an all-time low, and because your home is used as collateral. The lack of collateral for credit cards is why their interest rates are so high.
You have lower monthly bill payments
When you combine all your payments into one, you no longer have multiple interest rates on multiple debts. This means smaller debt repayment amounts at the end of the month. This can be especially important if you're struggling with a tight monthly budget.
Friendly credit requirements
Because you're borrowing equity from your home, most lenders have more credit-friendly requirements than a first-time mortgage application. You don't need perfect credit to get a debt consolidation home loan. Reach out to the regional loan officers at River City Mortgage to see how much money you can qualify for.
One payment instead of several
By consolidating your debt through a home loan, you make your life easier. You no longer need to manage a list of debts to pay each month. And having a single monthly debt payment reduces the chance of missing or forgetting to make a payment.
Is a debt consolidation home loan right for you?
Whether or not a debt consolidation home loan is right for you will depend on your financial goals, credit score, state of your monthly budget, and what you hope to achieve through debt consolidation.
Choosing to consolidate your debt through a home loan requires careful consideration of several important factors.
How much home equity you have and how much debt you want to pay off
The amount of home equity you have will determine how much of your debt you can pay off. If you have enough home equity to take a sizable bite out of any high-interest debt you're carrying, you stand to benefit from a debt consolidation home loan.
Do you want to improve your credit score?
If you're trying to bump up your credit score, a debt consolidation loan can often help. By eliminating many of the smaller debts you carry, and because a mortgage is viewed as "good debt" on your credit report, your credit score can benefit.
How can you get a debt consolidation home loan?
Before applying for a debt consolidation home loan, it's essential to understand your finances. Start by calculating the total amount of debt you'd like to pay off. Next, it's time to check how much home equity you actually have and whether you have enough to improve your financial situation.
At this point, reaching out to a home loan specialist, like the regional home loan analysts at River City Mortgage, can be a great help. We can help you go over your finances, find out how much home equity you'll be eligible to borrow against, and even find out what interest rates you qualify for.
Most importantly, we can help you assess your finances to determine whether a debt consolidation home loan is right for you. And if it's not, we can explore other loan options such as an FHA Refinance, Conventional Refinance, or VA Refinance, which might be of greater benefit to your family.
If you have questions about debt consolidation, would like to apply, or are interested in booking a no-charge consultation, get in touch with the regional home loan professionals at River City Mortgage today.