Using Home Equity To Consolidate Debt

As you pay your house payment each month, the amount of the house you own slowly increases. This is called your home equity. Once you have some equity established, lenders will allow you to borrow money from it with a second mortgage or home equity line of credit.

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As other debt from credit cards and loans build up, some people choose to borrow from their home equity to pay off the other debts, consolidating all debt into one mortgage or loan. Before you decide to do this, consider the following:

Benefits

Consolidating debt using your equity will usually give you a lower interest rate than the high-interest credit cards and loans. Many people like the convenience of fewer payments each month. The debt also is considered tax deductible once it is included in your house payment.

Drawbacks

Consolidating debt frees up your credit line on credit cards and can encourage you to acquire even more debt as a result. If you continue to consolidate your debt, it can exceed your property value, making it difficult or impossible to make a profit if you sell. If you fall behind in house payments, you will lose your home, so consider your ability to make payments on time before adding even more debt to your mortgage.

There are a few different ways to consolidate your debt with equity:

If you have a first mortgage already, you can refinance to include the other, non-house debt. You can also get a second mortgage or a home equity line of credit (HELOC) to pay it off. A second mortgage is a one-time, cash amount. A HELOC allows you to use borrow from your equity whenever you need to, up to a set amount.

If you have both a first and second mortgage, you can:

• Refinance your first mortgage for more than you owe so you get a one-time "cash out" to use for other debts, leaving the second mortgage.
• Refinance your second mortgage in a new cash-out first mortgage, leaving non-house debt.
• Consolidate both your second mortgage and non-house debt into your first mortgage by refinancing.
• Consolidate your second mortgage and non-house debt into a new second mortgage, leaving your first mortgage untouched.

Remember that consolidating your debt does not magically get rid of your debt. If you are struggling to make ends meet, take time to reevaluate your spending as you consolidate your debt to help prevent future financial problems.