Using your equity to help manage your debt

Learn how to use the available equity in your home to consolidate other debts.

One way some homeowners choose to manage their debt is by taking out a home equity line of credit. This loan may provide the opportunity to pay off higher-interest debt with a lower-interest home line of credit1. But this strategy requires careful consideration before you can really know if it's the right choice for you.

Take Advantage of the Equity in Your Home
As a homeowner, you have the opportunity to consolidate high-interest rate credit cards and loans by taking out a home equity line of credit. A home equity line of credit allows you to borrow against your available home equity to pay off other higher interest rate debts. To see if this choice will work for you, take a look at your current debt picture and ask your lender to run the numbers. If the interest rate on the home equity line of credit you qualify for is significantly lower than the rate you're paying on your debts, this move could save you money by reducing the overall interest expenses you pay1. Of course, the home equity line of credit you qualify for will depend on how much equity you've got in your home, as well as your income and credit score.

Here is a list of "do's" to keep in mind when you consider a home equity type loan:

Do be aware that your house is held as security on this kind of loan. Because of this, it's important to be sure of your ability to pay this loan in full and on time. If you are using your home equity line of credit to consolidate and pay off other debts, make sure you don't charge up those same accounts again, otherwise: 1) you'll face the same problem again, 2) it may make it difficult to pay off your home loan, risking default, and 3) it can have an adverse affect on your overall credit picture, and can even increase your interest rate on other accounts.
Do try to make the same payment amount on your home equity line of credit as you did on your higher-interest debt that's being consolidated. What you were paying in interest can then go toward paying off the loan principal. That way you can pay off the debt in the same time frame (or sooner), without incurring additional interest fees.
Do maintain a "cushion". You'll want to have sufficient savings to cover unexpected incidentals. So choose a home equity line of credit that's well within your limits, that allows you to continue your savings goals.
Do speak to your tax advisor. A home equity loan may offer tax-deductible interest, so find out if this would apply to you.
Do think about your future plans. If you plan to move soon, you may not qualify for this kind of loan.

Homeowner Tip: Determining how various loan programs work for you requires some number crunching. If this is not your strength, consider enlisting the help of a skilled financial advisor.

Staying on Track
Keeping a close eye on your credit accounts will go a long way toward getting a handle on your spending. If you track the amount you're accumulating, and the interest you're paying on it, you'll be in a better position to start managing your debt and building a stronger financial future.

[1] The relative benefits of a loan for debt consolidation depend on your individual circumstances and your actual debt payments. You will realize interest payment savings when you make monthly payments toward the new, lower interest rate loan in an amount equal to or greater than what you previously paid toward the higher rate debt(s) being consolidated.