How to get a home equity loan for debt consolidation

If you’re a homeowner in America, you likely receive a monthly credit card statement that makes you worried about your financial situation. Debt consolidation is a necessary process to regain control over your finances. This is especially true if you have a mortgage on your home, have children in college, or have incurred expenses due to unforeseeable circumstances.

If this is your case, you may be interested in acquiring a home equity loan for debt consolidation. In this article, we will discuss this type of loan, as well as about how it can help you and how to get one. Acquiring a home equity loan could be the first step in the process of getting your debt under control.

Define home equity

Home equity loans are often referred to as second mortgages. The first step to getting one is getting your house appraised.

The value of your home determines how much you have available to borrow against using your house as the collateral for the loan. To determine the equity, you need to determine how much your house is currently worth, minus what you owe on it.

For example, you are living in a home that you have appraised at a value of $90,000 and you owe $50,000 on your current mortgage. This means that you have a total of $40,000 in equity that you can borrow against.

How does it work?

This may seem like a great opportunity. However, you should stay aware of the fact that money lenders are happy to give you this second mortgage while you’re still paying off your first. Moreover, higher interest rates of home equity loans make it a hefty burden to pay off. Therefore, you should only consider this option if you can use the money to consolidate more debt. Importantly, you will need to consider the increase in interest payments you will have to pay on the new loan.

A home equity loan is a lump sum, meaning that you get the full amount that you want to borrow from the equity. Consequently, you can repay it back to the money lenders over many months (often five to ten years) at a rate of fixed interest.

How do I get one?

The only prerequisite for qualifying to get a home equity loan is a house that has some equity, meaning that it’s still worth more than the amount you owe on it. If this seems too easy, that’s because it is. It is important to remember that money lenders are interested in providing you this loan since it means extra monthly interest payments for them.

You may be wondering whether the lenders make any assurances on the value of your house and your trustworthiness as a borrower. Though each lender’s criteria differ, in general, they all follow certain guidelines.

They usually don’t want you to take out the entire value of the equity, requiring that you leave at least 20%. Using our previous numbers, this means that if you have $40,000 in available home equity to borrow. However, most money lenders would want you to leave at least $8,000.

They do this because they want some collateral on your house’s value. Simply put, lenders don’t want you to take the money and walk away from your property or let the house get run down. However, this becomes unlikely if you have so much money invested in it.

Lenders also look at your credit score to determine if you’re a trustworthy borrower. If your score is low, you may still be able to get the loan. However, since you’re a riskier investment, the lender may decide to hike your interest rates. This could make it more important for you to get accurate appraisals and budgeting to see if the loan is still worth it.

The Takeaway

Debt consolidation could be a homeowner’s ticket to a financially stable future. Home equity is a set value that most homeowners have access to and can use as leverage they need to borrow money and consolidate debt.

To use this strategy, you need to get your house appraised to find out its worth. Moreover, you will need to be evaluated by a moneylender, and decide how much you will need to borrow out of the amount available to you.

Obtaining a home equity loan is generally not difficult. However, you will need to ensure your house is worth enough to make it worth your time. In addition, you will need to decide whether you can budget for the interest rates that come with it.

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