Use Your Home Equity to Lower Your Monthly Debt Payments

Posted on Thursday, September 10th, 2009 at 5:12 pm in Financial Planning

If your debts are getting too big to handle, don’t despair! You might be able to reduce your total monthly bill payments and still pay off what you owe by tapping into the equity in your home and consolidating your debts.

If you’re struggling to keep up with the payments on your credit cards and other consumer loans right now, you should look for alternative options that can ease your burden and get you out of debt faster. If you own your home and have some equity in it (it’s worth more than your mortgage balance), you might be able to borrow against that equity at a relatively low interest rate.

You could apply for a debt consolidation loan or home equity loan, which gives you a lump sum that you can use to pay off your debts immediately. Then you make monthly payments on your new loan, which is sure to cost you less each month. For example, you might have been paying 20% annual interest on your credit cards. Now you could cut your monthly payments and/or get out of debt more quickly by using a paying home equity loan at a rate of, say, 8.5%. Don’t forget that with a home equity loan you get the added benefit of a tax deduction on your interest payments.

Another way to utilize your home equity for debt consolidation is via a home equity line of credit, or HELOC. This is more like a credit card in that you can take out as much as you like up to a credit limit, and you only pay interest on your outstanding balance at any given time. Interest rates on HELOCs are currently even lower than on home equity loans, at under 5% in some cases. If you can pay off all or most of your credit card debt with a HELOC, you can really save a lot of money by trading your high interest credit card payments for an economical home equity line of credit.

You can also save a bundle in monthly mortgage payments if you currently have two mortgages and you refinance to consolidate them into a single loan. If either of your present home loans has an adjustable rate, try to get a fixed rate mortgage when you combine the two into one. Many adjustable rate mortgages are designed to start artificially low, and then jump to much higher levels after a few years, so if that has happened to you, you would be far better off with a fixed rate now.

When you refinance your mortgage, there are two other ways you can benefit. Firstly, you might be able to opt out of paying personal mortgage insurance, if you had to take it out when you originally bought your house. Secondly, if your equity is sufficient you can ask to take some cash out when the mortgage is signed. Then put that cash, and the money you save on your reduced monthly repayments, towards your higher interest debts.

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1. 3 Ways to Get Out of Debt
2. Three Ways to Handle Unexpected Expenses
3. A Simple Plan for Paying Off Your Debts
4. Paying off Debt
5. Stay Out of Debt with Cash Advances