How Home Equity Finance Can Help You Pay Off Debt

Home equity finance is a form of financing that allows you to use the money that you’ve already paid toward the price of your house. By using this form of financing, you’re leveraging your investment in your home in order to help you meet other financial needs. While there are benefits and drawbacks to home equity finance, it can be a good option for some buyers who need extra cash now.A home equity loan will allow you to borrow money against the value of your home. For example, you purchased a home for $250,000. You’ve paid off $30,000 of the loan and in addition the value of your home has risen by $50,000. The current value of your home would be $300,000 and since you only owe $220,000 a bank or financial institution may allow you to borrow the $80,000 difference.You can use the $80,000 (or less if you borrow less) to do home improvement or pay off debt. Paying off your credit car, auto loan and other types of consumer debt is a good idea with a home equity loan, if you can afford the payments, for one very good reason – interest!The average interest on credit cards is around 13%. Some credit cards charge up to 20% interest on their balances. It’s easy to see how people can get buried under a pile of credit card with interest charges like these. If you carry even a small balance on your credit cards you are going to be paying for it throughout the life of that credit card. You’ll end up paying much more than you owe.On the other hand, home equity loans are averaging about 5% interest. Borrowing the same amount of money that you have on your credit cards from your home equity will save you a bundle in interest payments! Even though you’re borrowing just as much, the interest is what really makes the major difference.Before you decide that borrowing from your home equity to pay off debt is the way to go, you need to keep a few things in mind. First, paying off your credit cards in not an invitation to turn around and charge them up again. You’ll still need to be mindful of your spending and make sure to put away, cut up or just avoid using your credit cards.Secondly, in addition to a mortgage payment you’ll now have to make home equity loan payments. You should carefully evaluate your financial situation to determine if you’ll be able to keep up with your second set of payments. Missing a credit card payment isn’t going to be that big of a deal in the long run, but if you start missing home equity loan payments you could have some big problems on your hands.If you’ve considered these factors and decided that home equity financing is right for you, you should contact your bank or another financial institution. A loan officer there will be able to walk you through the loan application process so that you can pay off your debts with the equity in your home.