You can borrow money against the equity in your home which you can further use to pay off your existing debts. You should understand equity in the first place so that you can take a correct decision. Equity is not the payments that you have already made, but it is the difference of the prevailing market value of your home with the amount that is remaining on your mortgage which you still have to payback. Home equity loan is a secured loan where your home serves as the collateral security and therefore has a considerably low rate of interest as compared to other non-secured loans including credit cards.
The Appealing Features
The most appealing feature of home equity loan is that the rate of interest is much lower as compared to others. You have the option to lock in a fixed rate of interest for the entire life of the loan which will take away the worry of rising interest rates. It is also a tax-deductible loan interest as you own the home still. You may find some home equity loans that have no closing costs or prepayment penalties, along with origination and application fees as well. Consider your options and talk to a tax advisor before you take on such loan.
Amount You Can Borrow
The amount you can borrow depends on the combined loan to value or CLTV ratio calculated after taking several factors related to your home. Ideally, you get eighty to ninety percent of the appraised value of your home. If you have a good credit history and credit score, then it will also affect the amount you can borrow and the estimation of the rate of interest as well. You can check online to know more about credit score and credit history and how it affects your loan eligibility. Also learn about credit card debt consolidation which is helping many and providing relief to the debt sufferers.
Variants Of Home Equity Loans
Home equity loans usually come in two varieties. One of it is fixed rate loans, and the other is lines of credit. When you select to take a fixed rate loan, you will be provided with a single lump sum payment. This amount you will have to repay along with interest over a fixed time which is ideally fifteen years. You can agree upon a fixed rate of interest on the amount borrowed according to your preference which remains same throughout the loan tenure. In case the home is sold, you will have to pay the entire amount before it.
Use It Sensibly
If used sensibly, home equity loan can be a very useful tool for repayment of your existing loans. All you need to have a steady source of income to continue repaying it for a long time and a good credit history to be eligible for the loan. As the rate of interest is low, the monthly amount is also low which makes it easier for you to pay back. Since the amount received is much more than any traditional loans, you have enough cash on hand as well to use making this tax-free source of borrowing a more sensitive alternative.