If you have a lot of debt and you’ve also owned your home for several years, you may be able to tap your property’s equity to pay down your debt through the use of a Home Equity Line of Credit, or HELOC.
Let’s take a look at how you could use a HELOC to borrow as much as 90% of your home’s value to help you not only pay off your outstanding debt, but also make repairs and upgrades to your home.
What is a HELOC?
A HELOC is essentially a line of credit or revolving credit account, similar to a credit card, that is secured with a lien on your home. The more equity you have in your home, the more you can borrow – up to 90% of your home’s value if it’s already paid off. You can make a draw on your line of credit at any time, which makes a HELOC a great option for some quick cash if you have plenty of equity in your home.
Here’s How a HELOC Works
Because HELOCs are revolving lines of credit, your payments are only on the outstanding balance of what you’ve borrowed. Keep in mind, though, that the line of credit typically is interest-only for the first 10 years. After that, your loan balance is frozen and converts to an amortizing loan that will still have a variable rate.
Interest rates for HELOCs are adjustable, and will vary depending on the borrower’s creditworthiness and other factors (including how much equity you have in your home. To get the best rates, you’ll need at least 20% equity.)
The most obvious benefit of a HELOC is that you can draw on your line numerous times. So you can start by paying off your outstanding debts, then move on to your next financial goal as soon as that balance is paid off. Also, the interest on a HELOC is tax-deductible, so that automatically lowers the interest rate you’re paying compared to other things like consolidation loans and credit cards.
As great as a HELOC can be for some folks, especially if you’re in debt and can’t figure out how to pay down your debt, you are going to lose a lot of equity in your home. If you have no intentions of moving or selling, that may not concern you, but do keep in mind if you ever default on your HELOC, you could lose your home to foreclosure, no matter how well you’ve paid your mortgage.
Also, having a readily-available source of cash can be too much temptation for a lot of people. If you think a line of credit at the ready anytime you want to make a big purchase is just too much temptation for you to handle responsibly, it may not be a good solution for you.
[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]