I remember that one of Pres. Bill Clinton’s most famous phrases was, “I feel your pain”. Well, if you’re having a serious problem with debt, I feel your pain. I can still remember how it felt to be young and thousands of dollars in debt. We were in our first house and had no equity to speak of so there was no way we could use a home equity loan to pay off our debts.
How long have you been in your house?
If you’ve been in your house and making payments on the same mortgage for 10 years or longer, you could probably borrow money in the form of a home equity loan to pay off all your debts. Your loan would be either what’s called a homeowner’s equity line of credit or a second mortgage.
What are the differences between these two options?
Most home equity loans are second mortgages. The way it works with a second mortgage is that you get a lump sum of money and then pay it back in monthly installments over some period of time. This is usually from 10 to 15 years. Your loan will have a fixed interest rate – just as you would with a conventional mortgage. In comparison, a homeowner’s equity line of credit (HELOC) is more like a credit card. You have a credit limit and are required to pay back only the money you use. In fact, you generally receive a checkbook or credit card, which, you then use to tap into your credit until you reach your credit limit. You’ll make a minimum monthly payment on your outstanding balance as you use your credit. However, beyond this, you get to determine how much you pay back the money and when.
Which type of loan would be best to pay off debt?
If your goal is to pay off debt, your best choice would probably be a home equity loan – or second mortgage. Most experts say that this type of loan is best because it offers the security of a locked-in interest rate and the fact you’ll know exactly how much you’ll have to pay on the loan every month.
The benefits of paying off debt with a home equity loan
The two most important benefits of using a home equity loan to pay off debt is that first, you will have a much lower payment each month than the total of the minimum monthly payments you’re now making. This is because a second mortgage will have a much lower interest rate than your current debts. For instance, if you have credit card debts at 18% or higher, you could swap them for a home equity loan at 8% or less. You’ll also get rid of all those of obnoxious creditors that have been harassing you for payment. You’ll have only one payment to make a month instead of the multiple payments you’re probably juggling now. Of course, this can be a negative as well because as noted above, it can take you 10 years or longer to pay off that home equity loan, which represents a very long-term commitment.
A brand new mortgage
Some experts suggest that if your goal is to pay off your debts, it might be better to get a brand new mortgage instead of a homeowner equity loan. Given today’s mortgage rates, you could probably get a new mortgage at 6.5 to 6.7% versus the 8.31% you’d probably pay on a homeowner equity loan. You could take the difference between your old and new mortgage as one lump sum and use that money to pay off all your debts.
If you don’t have sufficient amount of equity
If you have not been in your house long enough to have enough equity to pay off all your debts, you should consider letting us handle them. We can negotiate with your creditors to settle your debts, probably for much less than you owe and get you on the road to being debt-free in 24 to 48 months. Don’t take out a homeowner equity loan until you’ve spoken with us to see what we could do to help. Call our toll-free number or fill in the form on this page to learn how we could help you find debt relief.