Using A Home Equity Loan To Pay Off Debt
Many Americans have a revolving amount of debt from non-mortgage related expenses. American households hold a total of $16.51 trillion in debt – which is up $2.36 trillion since the end of 2019, just before the COVID-19 pandemic – according to the Federal Reserve.
Fortunately, many people can use their home equity to manage their debt.
How It Works
The first step to using your home to help address this problem is understanding what home equity is. Home equity is the difference between what your home is worth and what you owe to the lender.
You have two options if you choose to tap into your home’s equity. You can get a home equity loan or a home equity line of credit (HELOC).
Home equity loans are second mortgages that allow you to tap into your equity so you can get access to cash. You can also use the cash loan to pay off other higher-interest debts such as credit card debt and possibly student loan debt. Mortgages usually have lower interest rates than credit cards.
For example, you might take out a home equity loan with a 4% interest rate to pay off the debt on your 18% interest rate credit card and end up paying less in interest over the long term.
Another option that allows you to tap into your home’s equity is a home equity line of credit (HELOC), which provides the borrower with a line of credit that can be used as needed.
Let’s take a closer look at what home equity loans and lines of credit are and how they can help you consolidate your debt.
Home Equity Loans, Explained
A home equity loan is a second mortgage that allows you to get your loan all at once, or in a lump sum. The amount you’ll be able to get will be smaller than your original mortgage since lenders will rarely let you borrow 100% of your home’s equity. The repayment span is also usually a shorter period compared to your original mortgage.
Once your lender closes your home equity loan, you’ll get a lump sum payment from your lender. You’ll make a second mortgage payment separate from your primary mortgage payment.
Rocket Mortgage® is now offering a Home Equity Loan, which is available for primary and secondary homes.
Home Equity Line Of Credit (HELOC), Explained
A home equity line of credit is similar to a home equity loan, but you get cash as a line of credit instead of a lump sum. You can usually borrow between 75% – 85% of your home’s value with a HELOC. A HELOC is a lot like a credit card because you can carry a balance from month to month and make minimum payments. You pay interest on the amount you draw and the interest rate can vary.
