Focus on Finance
Has your holiday spending left you with big balances? You aren't alone; now is the time many consumers seek relief from credit card debt and high interest rates.
If you're buying or own your home and could use some extra money, it may be time to use the equity in your home towards consolidating debt with a home equity loan.
Debt consolidation remains the number one reason people take advantage of home equity loans. In many instances, the opportunity to transfer debt from high-rate credit cards and other sources to a lower-interest home equity loan makes economic sense.
With low fixed-interest rates and the possible tax advantages a home equity loan can provide, more homeowners are borrowing from the money they've invested in their homes. Additionally, consolidation enables you to make only one monthly payment to one source versus multiple creditors, freeing up valuable personal time.
Beyond freeing you to pursue other interests or investments, home equity loans generally carry a tax advantage other loans don't offer. The loan is secured by your primary residence, so the interest paid is usually tax deductible. However, you should consult your tax advisor regarding the deductibility of interest.
No home is the same; no loan is the same
Using your home as collateral for any loan is a serious matter. Before pursuing a home equity loan, carefully evaluate your ability to repay. For smaller or low priority purchases, a home equity loan may not be the best financial solution. If you decide to take advantage of a home equity loan, the lender can help you choose the home equity loan that's right for you.
Home equity loans typically come in two varieties: lines of credit or fixed-rate loans. A fixed-rate home equity loan is a traditional second mortgage, which provides a set monthly payment for a specific length of time and specific terms for repayment. A line of credit typically has a variable rate and can offer greater flexibility because you can access your money when you have a need over a long period of time without going through an additional application process.
Use your money wisely
Comparison shopping for home equity loans is strongly recommended. When evaluating prospective lenders, ask the following questions:
- Is a home equity line of credit the most suitable loan for my needs, or would another approach-such as a fixed-rate home equity loan or an installment loan-be more appropriate?
- A few questions specifically related to a home equity line of credit: What's the promotional rate, and how long is it effective? What's the rate of interest on this loan after the promotional rate? If the interest is variable, on what is it based? How often can the rate change? How high can the interest rate go? What additional fees are associated with the loan?
- Can any of the credit terms be changed without my approval?
Potential to ease financial concerns
Using the equity in your home can be a disciplined form of borrowing if you carefully evaluate the options and make informed decisions. Paying a lower interest rate on your obligations and the potential tax benefits may make a home equity loan an appealing option-if it works for your specific need.
It's important to note that everyone has unique financial situations requiring specialized financial products. Make sure a home equity loan is appropriate for your specific situation. Before committing to use the equity in your home against other forms of debt, carefully evaluate your financial situation. Examine your spending habits to avoid racking up debt again, and talk with a professional lender to determine if this is the most appropriate financial product for you. TPW