How to use Home Equity to Take Control of your Debt

By on | General Debt & Loan Consolidation Information.

How to use Home Equity to Take Control of your Debt

Credit card debt, overdraft fees, late utility bills – living on the edge of a tight budget is like playing with fire, occasionally a miscalculation will cost you, and you’ll end up getting burned.

Many Americans today live beyond their means, spending lavishly on expensive home entertainment systems, gaudy cars or indulgent vacations. They swipe their credit card and all their worries go away – until it comes time to pay the bills.

Rolling over credit debt comes with a heavy price; typically an exorbitant interest rate is tacked on every time an outstanding balance is left unpaid. This can lead to a cycle of paying off the interest, and putting off the principal, as utility bills and mortgage payments take precedence.

While this technique is fine in the short term, paying off credit card debt should be a top priority, as interest payments is you’re hard earned money simply flushed down the drain. As a homeowner, one option is opening a home equity line of credit (essentially a second mortgage) to consolidate your debt payments into a loan with a much, much lower interest rate. Not only will you be paying less in interest, mortgage loan interest fees can be dedicated from your taxes, while consumer debt interest is not.

While taking out a second mortgage on your home is no quick fix, you would be saving thousands of dollars in interest payments by borrowing against the equity you have in your home. These loans could have a term limit of 10, 15, even 20 or 30 years, so it’s important to fully understand the risks and commitments before you sign on the dotted line. Obviously, the longer the lifetime of the loan, the lower your interest rate but the longer you are on the hook making payments.

Keep in mind, the amount you will owe at the end of every month is not a maximum amount due, but a minimum amount due. You can also reduce the amount you pay in interest by paying more off each month than is due, thus paying the loan off quicker than necessary.

Typically, the issue with people who get into debt troubles is spending habits. Careful budgeting and money management will help you reduce your debt, as well. Try limiting your credit card use, and stop automating your bill payments so every month you see exactly how much is coming in, and how much is going out.

If a second mortgage isn’t an option, there are still other vehicles out there for taking control of debt. There are debt consolidation and debt counseling services available, and many creditors are willing to negotiate payment if you call them and explain your situation. Obviously, when entering into an agreement with a third party to settle your debt, be wary of extra fees and lofty promises. Scams run rampant in the world of non-bank financial products.