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November 10, 2015 | debt-consolidation

Using Home Equity to Consolidate Debt: Pros & Cons

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.

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 “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.

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