How to use a HELOC for Debt Consolidation

A home equity line of credit (HELOC) is a great tool for debt consolidation. By taking advantage of your home’s equity, you can pay off your high-interest debt and reduce your monthly payments. In this article, we’ll explore how to use a HELOC for debt consolidation and provide seven tips to get the most out of your consolidation loan.

Know Your Home’s Equity: 

The first step in using a HELOC for debt consolidation is to know how much equity you have in your home. Equity is the portion of your home’s value that you own outright; it’s what’s left after you subtract your mortgage balance from your home’s appraised value. You can usually borrow up to 85% of your home’s equity. Though the amount you ultimately qualify for will depend on factors like your income, debts, and credit score.

Shop Around for the Best Rates:

Once you know how much equity you have in your home, it’s time to start shopping around for the best rates on a HELOC. Some lenders will offer promotional rates for a limited time. So it pays to shop around and compare offers from multiple lenders before selecting one. Use our mortgage calculator to calculate your rate!

Consider a Fixed-Rate Loan

If you’re concerned about rising interest rates, you may want to consider a fixed-rate loan instead of a HELOC. With a fixed-rate loan, you’ll have the same interest rate for the term of the loan. Typically ranging from five to 15 years. Of course, you’ll also have a higher monthly payment with a fixed-rate loan since you’ll be repaying both principal and interest each month..

Use an Interest-Only Loan Wisely

An interest-only loan can be another option for consolidating debt with a HELOC. With an interest-only loan, you’ll only be required to make payments on the interest accruing on the loan for a set period of time - typically three to 10 years.

Get Help with Your Taxes

When you consolidate debt with a HELOC, the IRS considers it a “cash out” refinance. Therefore, taxes are due on the difference between what you owe on the original mortgage.

Create a Budget and Stick to It

One of the most important things to do when consolidating debt with a HELOC is to create a budget and stick to it. This will help ensure that you don’t rack up new debts while trying to pay off old ones.

Don’t Use More Than You Need

Finally, don’t borrow more money than you actually need to consolidate your debts. It’s important not to get in over your head with debt just because you have access to more money.

Bottom Line:

A HELOC can be an excellent tool for consolidating high-interest debt and reducing your monthly payments, But it’s important to carefully consider all of your options before taking out any type of loan. Be sure to speak with a mortgage advisor  before consolidating any debt. If you’re ready to take the next step in your home finance journey click the button below to schedule an appointment. 

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