Paying off your credit cards can be a struggle. Even if you routinely make the minimum payment, you'll find that after several months you have hardly made a dent in the amount owing. There is a way out. If you have a credit score that satisfies the lending institution and enough home equity, you can take out a home equity loan and eliminate the credit card debt. For starters you need to understand what debt consolidation is.
Debt Consolidation
Debt consolidation is the process of taking two or more of your debts (such as credit card debt) and consolidating them into one loan. If you have two credit cards, one with $3,000 outstanding and one with $2,500 outstanding, you could borrow $5,500 and pay off the credit cards. This new $5,500 loan is a consolidation loan.
A debt consolidation loan may be secured or unsecured. Secured loans have better interest rates and less stringent credit requirements, but may have fees associated with them. Bankers sometimes call debt consolidation "debt refinancing".
Advantages of Debt Consolidation
A consolidation loan provides several benefits: The interest rate may be lower, the time to pay off all debt may be shorter and the monthly payment may be lower. A consolidation loan also has psychological benefits, giving a sense of relief from debt and control over your finances.
Understanding Home Equity
Home equity is the dollar amount of your house that you own, free and clear of your mortgage. You can determine your home equity by subtracting your mortgage amount from your home's market value. If your home is worth $250,000 and you have a $100,000 mortgage, you have $150,000 of home equity.
How Home Equity Helps With Credit Card Debt
Home equity can help you pay your debts through a home equity debt consolidation loan. This loan reduces your home equity by the amount of the loan. But securing the loan also reduces your other debt and probably reduces the amount of interest you are paying on that debt. You will gradually increase your home equity as you repay the loan.
How to Get a Home Equity Loan
Start first with the company that gave you your mortgage. This may save you money in fees. Then shop around and compare the rates and fees offered by other lenders. Fees associated with a home equity loan can include the cost of an appraisal and legal fees. Once you have a loan, consider keeping just one credit card account and reducing the limit on that card to only what you need for monthly spending. This could affect your credit score, however.
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