Are you overwhelmed by a credit card, a personal loan or a medical bill? Depending on your financial situation, using a Home Net Worth Line of Credit (HELOC) to pay off debts can be a smart move.
However, it is important to understand how to repay or consolidate debt with HELOC to decide whether this makes sense to you.
. Unlike traditional mortgages or personal loans, it functions like a credit card with a rotating credit limit, which makes you money at a time. HELOC allows you to use almost anything like a large purchase, home renovation or debt consolidation.
Although some lenders offer it, most HELOCs have variable interest rates. HELOC Annual Percentage (APR) is usually much lower than the credit card rate. So while they have the same features as credit cards, they can be more affordable and can actually help you pay off your credit card debt.
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To repay debts through HELOC, you need to know how to qualify and the rules that must be followed. This is the basics of getting HELOC and using funds to pay off other debts.
HELOC lenders usually look for homeowners with 15% to 20% of the equity in the home. Equity is the value of your home minus the balance of your outstanding mortgage. This means that if your mortgage balance is 80% to 85% lower than the appraised value of the home, you are more likely to get approval. For example, if the appraiser claims that your home is worth $400,000, the principal of your outstanding mortgage should be up to $320,000 to $340,000. If your balance is higher, you will not be eligible for HELOC.
You also need to meet the requirements of the basic borrower, such as having a history of A, low, stable income and on-time payments.
HELOC has two main stages.
Lottery period: You can approve you during the draw to approve your credit as much as possible, usually for up to 10 years. During this period, you are usually asked to make a minimum interest payment for the amount you withdraw (although you can pay more). During this time, you can raise funds as needed to pay off medical debts, credit card bills, or other large debt payments.
Repayment period: During the repayment period, your minimum payment will be increased to pay interest and principal until you pay off your balance. The repayment period usually lasts for 20 years, and you will no longer spend money during this period.
Helocs are mortgage loans that use your home as collateral. A secured loan is less risky to the lender because if the borrower is unable to repay the debt, the lender can grab the house.
However, secured loans may be more risky for borrowers. If you have trouble paying for your monthly payments on HELOC and original mortgage, your home may be put into practice. So while HELOC can help you get rid of debt, only consider this option if you are confident that you can keep up with your loan payments. You don't want to lose your home to try to pay off unsecured debts, such as credit cards or personal loans.
There are several benefits to HELOC, especially when you deal with high interest debt. Here are some professionals worth considering.
Reduce interest rates: HELOC rates can be lower than those of credit cards or other unsecured loans. Using lower-interest credit lines to repay higher-interest debt will save you interest.
Affordable payment: For the first decade or so, you can usually make interest-only payments on HELOC. This is more affordable than the minimum payments for other borrowing methods.
Can improve credit utilization: Refers to the percentage of available credits you use. The lower the utilization rate, the better. For example, if you owe a credit card $1,000 with a limit of $10,000, it's better than a credit score than a credit card you owe $9,000. FICO credit scoring models usually do not include HELOC when calculating credit utilization. (However, other scoring models may.)
Streamlined payment: Simplifying payments from multiple credit cards to HELOC payments may make managing your financial situation easier.
Consider these potential drawbacks before paying off other loans with HELOC.
Need enough home equity: If you don't have at least 15% equity in your home, it can be difficult to obtain HELOC.
May be incurred for closures: If the lender charges, you can pay 2% to 5% of your credit limit.
Variable interest rate: Repaying variable interest rate HELOC can be difficult to budget, as payments may vary regularly.
Breach of contract may risk foreclosure: Your home is mortgaged to HELOC, so if you are in trouble, the lender can take back your home. Not paying back your credit card, personal loan or student loan bill can have consequences, but because these are the types of unsecured debt, companies can’t take anything like your home.
Lower interest rates are one of HELOC's biggest advantages, which is a reliable option for those with high interest debt.
“As long as you can consolidate your debt with a lower interest rate to remit to your loan, it can put you in a better financial position,” said Dre Torres, loan officer at Cornerstone First Mortgage, via email. “HELOC’s savings can help you gain positive monthly cash flow or pay off other debts.”
However, efforts to repay HELOC can have serious consequences.
"HELOC is associated with your home, so it's not something you want to take lightly. Make sure you are financially diligent and don't owe debt," Torres noted. "If you lack a stable budget or bad spending habits, HELOC is usually a bad idea.
If HELOC is not for you, there are other ways to consolidate your debt.
Home equity loan: The rights to a one-time home access are usually repaid at a fixed interest rate.
Cash refinancing: If you have enough equity, you will have more refinancing than existing mortgages. And use it to pay off debts.
Personal loans: You can borrow a payment to consolidate or pay off debts of higher interests and pay them back at a fixed interest rate (usually within five to seven years).
Credit card balance transfer: If you can pay off your balance before the end of the adverse period, transferring high interest debt to A can save you money. Often, you need a good reputation to qualify.
Credit Consulting Plan: If you work hard to stay up to date, some nonprofits can help you negotiate cheaper payments with your creditors.
If you have high interest credit card debt, paying off your debt using HELOC may be a good idea. Helocs tend to have lower rates than credit cards because they are guaranteed by your home. But it also means that if you have trouble paying back the balance, you may lose your home.
HELOC is usually displayed as revolving credit on your credit report. Like other credit accounts, lost payments can damage your score. HELOC will also affect your credit utilization. Although FICO does not include HELOC in your utilization calculations, other credit scoring models are possible.
You can use HELOC or home equity loans to pay off your high interest debt. Both use your home as collateral. HELOC usually comes with variable interest rates. The interest rate on home equity loans is fixed, making them more predictable. If you choose interest-only payments during the draw period, your HELOC payments may be cheaper. However, when the draw period ends, your payment will increase significantly.
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