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How to consolidate debt using your home equity

Financial Advice

DEBT CONSOLIDATION

Articles and research about consolidating debt

How to use home equity to consolidate credit card debt

Financial Advice

DEBT CONSOLIDATION

Articles and research about consolidating debt

Using Home Equity to Consolidate Debt

Published November 10, 2015 | Updated October 19, 2016

Credit card debt. Student loans. Mortgages. Personal loans. Retail debt. Medical bills.

If your various forms of debt are starting to feel overwhelming — and especially if you’re paying high interest on some balances — you may wish to condense them into one easy-to-pay format via a fixed-rate home equity loan.

Such a solution can offer terms of 5, 10, 15 or 20 years in amounts based on the available equity in your home — the assessed value minus the amount remaining on your mortgage. Your home is then considered collateral toward the loan. Conveniently, Amplify charges no penalties for paying early or paying extra toward your principal, and it is not among lenders that charge an “origination fee” of 1–6 percent in addition to interest. In fact, its administrative fees can be no higher than 3 percent of the loan principal per state law.

Benefits of Consolidating Debt With a Home Equity Loan

  • Typically, such loans offer much better interest rates than other loans and credit cards, and they’re often easier to secure because your home helps guarantee repayment.
  • Paying off your other debts can shield you from exorbitant interest rates and reduce or eliminate pressure from irate creditors.
  • If your combined card balances are exceeding 30 percent of their limits, transferring such debt could improve your credit score. Depending on whom you ask, a score of 640 or less may be problematic.
  • Having only one monthly payment to consider may better discipline you to save up those funds each month.

Disadvantages of Using a Home Equity Loan to Consolidate Debt

  • You could face foreclosure in the event of a default.
  • Some borrowers find it difficult to curb their spending when the funds from their home equity loan are available in their accounts. That only leads to further problems with debt, increasing the risk of default on the loan.
  • If you’re almost finished paying off a debt, you may end up paying more interest on it if it’s incorporated into a longer-term home equity loan.
  • Incorporating private or federal education loans into a home equity loan may not be worthwhile, as they tend to come with valuable tax benefits. Consult a tax professional before refinancing them.
  • Getting a loan to consolidate debt makes sense only if the new loan offers a better interest rate than what you’re already paying.

Ultimately, your ease in securing such a loan and the terms involved will depend on your credit history, whether you’ve made regular payments on your credit cards and whether you have a co-signer.

How to Decide What to Include in a Debt Consolidation Loan

Before applying for your debt consolidation loan, you need to determine which items should be included. Factors to consider are:

Consider including high interest rate loans in your debt consolidation loan

High Interest Rates

Are you paying more than 8.00% APR on any of your balances, whether credit card or personal loan? If so, consider including them if your debt consolidation loan interest rate is lower than what you're currently paying.

Consider including loans with long terms in your debt consolidation loan

Long Term Loans

If you’re almost finished paying off a debt item, you may not want to include it; you may end up paying more in interest in the long run. But if you have some longer term loans, you may benefit from consolidating them.

Consider including credit cards with high interest rate loans in your debt consolidation loan

Credit Cards

Long after the introductory rate is gone, credit cards generally charge higher interest rates. If you're carrying balances month-to-month that you can't easily pay off, consider consolidating them. Just be sure not to put new balances back on them for a while.

Consider including store loans and store credit balances in your debt consolidation loan

Retailer Loans & Store Credit

If you financed your furniture or appliances through the retailer on store credit, you may want to consider including those loans or balances in your consolidation loan, especially those that no longer have a low interest rate.

You may not want to include federal or private student loans in your debt consolidation loan

Education Loans

Private and federal student loans have tax benefits that may no longer apply if you include your student loans in your debt consolidation loan. Consult a tax professional before refinancing an education loan.

Unless you have a high interest, you may not want to include your auto loan balances in your debt consolidation loan

Auto Loans

If your auto loan interest rate is low, you may not want to include your auto loan in your consolidation. In fact, if you have available equity in your auto, you may be able to use it for a cash-out auto refinance to help pay down some higher interest debt.

Paying On Your Debt Consolidation Loan

A home equity loan will help solve your credit problems only if you make the lifestyle changes necessary to keep you from accruing additional debt. Compare lenders’ rates, fees and loan intervals before making a decision, and be realistic about the payment you can make each month over the life of the loan.

“Getting a debt-consolidation loan to make your payments more manageable doesn’t require you to change your behavior,” cautions Robert Berger on Money.USNews.com. “It’s similar to losing weight with a dieting pill; if you don’t also adjust your eating habits, you’ll probably pack the pounds back on once you quit using the pill. (Such loans) will work over the long term only if you can be financially disciplined enough to change your lifestyle so you don’t go into debt again.”

Because we’re a financial cooperative working in our members’ best interest, Amplify Credit Union can offer some of the best home equity loan interest in the Austin area. Contact us for advice.

Ready to Consolidate Your Debt With a Home Equity Loan?



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