Consolidating Debt Using Home Equity

Using your home equity to consolidate debt gives you the advantage of turning non-tax-deductible or "bad" debt into tax deductible or "good" debt.

Remember: once your high-interest debt is paid off, don't charge up your credit cards again.

For many people with high-interest credit card debt, it makes very good financial sense to consolidate that debt using your home equity . When you consolidate debt, you're using your home equity to pay off the higher-interest creditors while "rolling" that debt into your mortgage. When you do this, you're not reducing the amount of your debt. Instead, you're lowering the interest rate on your debt, which makes it easier to pay off.

Why consolidate debt using your home equity? Here are the top 3 reasons:

   1. You're paying a lower interest rate with a home loan than you would on a credit card, making it easier to pay off your debts.
   2. The interest on your mortgage is usually tax-deductible* whereas the interest on a credit card isn't.
   3. When you consolidate your debt, you only have to make one monthly payment as opposed to several. By having one lower monthly payment, you could be paying less each month than you would have if you hadn't consolidated. Calculate the advantages of using a home equity loan to consolidate debt.

There are a three ways to consolidate debt using your home equity:

1. Cash-Out Refinance

With a cash-out refinance, you're refinancing your existing mortgage loan amount to a new loan amount greater than what you owed on the old mortgage and taking the difference in cash. For instance, let's say you have $10,000 in credit card debt. Your existing mortgage balance is $100,000. You could refinance your old mortgage to a new loan amount of $110,000. In essence, you are adding $10,000 to your mortgage balance which you will use to pay off your credit card debt.

2. Home Equity Loan

A home equity loan is a second mortgage that allows you to turn your home equity into cash without refinancing your first (or existing) mortgage. With a home equity loan, you receive your money in one lump sum and it will usually close in less time than it would take to refinance your first mortgage. Quicken Loans offers home equity loans for up to $500,000.

3. Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) works very similar to a credit card except that it uses your home equity as the revolving line of credit. Instead of receiving your money in one lump sum, you draw from your account only when you need to and make payments only when you use the money. You can close on a Quicken Loans home equity line of credit in as little as ten days. Quicken Loans offers home equity lines of credit for up to $500,000.

Home Equity Line of Credit

Remember, when you consolidate your debt, be very careful not to run up the balances on your credit cards again. Consider cutting them up and keeping one for emergencies only. And if you increase your monthly cash flow by consolidating, you should consider saving more money, investing it or using it to pay down your debt faster.