Using Your Home Equity for Debt Consolidation

By Karen Lawson Columnist

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The average American household owes approximately $8000 in unsecured debt, which doesn't include secured debt such as your mortgage or car payments. If you are struggling with high interest rates, late fees and additional charges on credit cards and other debt, you may be able to use some of your home equity for debt consolidation.


How Does a Home Equity Loan Work?

Home equity is the difference between the present value of your home and what you owe in mortgage loans. For instance, if your home is worth $350,000 and you owe $250,000, your equity is about $100,000. If you want to take out a home equity loan, your mortgage lender will likely require a formal appraisal of your home to establish its current value. Its a good idea to shop for a home equity loan. Lenders offer choices between equity lines of credit and home equity loans. A line of credit works like a checking account, except that the amounts you use are "withdrawn" from your home equity. If you have $100,000 in home equity, and use your equity line to pay off $10,000 in credit card debt, your equity is reduced to $90,000. A home equity loan is a mortgage loan. It is for a set amount, and you will repay it in monthly payments as you do with your mortgage. Your payments on a home equity line of credit can vary according to what you owe. Interest paid on home equity loans and lines of credit may be tax deductible, and both are secured by your home.

Using Discretion with Your Home Equity Loan

The amount of your home equity may seem like a lot of money, and it may well be. However, it is an asset that should be used with discretion. Using home equity to fund extravagant purchases can lead to trouble if the real estate market or your financial situation changes. A financial advisor can help you decide how to use debt consolidation options to your best advantage.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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