Consolidating Debt with a HELOAN: A Smart Way to Get Ahead

Are you tired of juggling debt payments every month? A Home Equity Loan (HELOAN) can help reduce the stress of managing an overwhelming debt load. A HELOAN allows you convert some of your home equity into cash and use the funds to consolidate worrisome balances. You can potentially be out of debt sooner and save a bundle in interest.

How a HELOAN Works

To illustrate how a HELOAN works, let’s assume your home is worth $475,000 and you owe $235,000 on the mortgage.

If the lender lets you borrow up to 80% of the equity from your home, you can access up to $145,000 ($475,000 * .80 – $235,000).
You can use the cash from the loan proceeds to consolidate debt, or however else you see fit.

Borrowers are subject to eligibility guidelines. To qualify, most lenders require a certain credit score and debt-to-income (DTI) ratio. You can calculate your DTI by dividing your total monthly debt payments by your gross income (income before taxes and deductions).

If you pay lenders and creditors $4,000 monthly and earn $9,000, your DTI is 44%.

Benefits of Consolidating Debt with a HELOAN

Using a HELOAN to consolidate debt has some definite advantages:

Simplified debt management. Debt consolidation with a HELOAN helps simplify the repayment process. Instead of paying several creditors, you’ll have just one monthly payment.
Lower interest rates. HELOAN typically offers lower interest rates than many other forms of debt. You could cut the interest costs and speed up your debt payoff efforts.
Fixed monthly payments. You’ll also enjoy a set monthly payment over the loan term since the interest rate is fixed. Plus, HELOAN often comes with longer loan terms to lower your payment.

Some Risks and Important Considerations

A HELOAN is an ideal way to consolidate debt but it isn’t without risks. Here are some potential drawbacks to consider:

Increased debt load. You must keep the cards locked away if you use the loan proceeds to pay off credit card debt. Otherwise, you risk racking up even more debt than you started with.
Risk of foreclosure. A HELOAN acts as a second mortgage and uses your property as collateral. If you miss payments, the lender could foreclose on your home.
Credit consequences. Your credit health could also suffer if you don’t make timely payments on your HELOAN. Once the account is 30 days past due, the lender may report the delinquent status to the credit bureaus.

Also, keep in mind that you may be responsible for closing costs. So, it’s best to compare potential cost savings with loan fees to make an informed decision.

Tips for Responsibly Managing Your Debt Consolidation HELOAN

A HELOAN only makes sense if you can manage it responsibly. Otherwise, you risk damaging your credit and financial health. Here are some tips to keep in mind:

Only borrow what you need. Resist the temptation to borrow more than you need. Doing so helps keep your monthly loan payment and borrowing costs reasonable.
Use the loan proceeds for their intended purpose. Don’t borrow extra funds to cover other expenses if you’re committed to paying off debt. You’ll create an even larger debt load, potentially leading to financial hardship.
Make timely loan payments. Consider enrolling in automatic payments to stay on track. You’ll avoid late payment penalties and adverse credit reporting.

How to Determine if a HELOAN is Right for Debt Consolidation

A HELOAN could be a smart move towards financial security. That said, you should have the means to comfortably afford the monthly loan payments. It’s equally important to remain committed to staying out of debt. But if you plan to move soon, the costs of a home equity loan could outweigh the benefits. In this case, it may be sensible to explore other options.

If you decide a HELOAN is a good fit, apply online or schedule an appointment with one of our lending experts to learn more.

All loans and lines of credit are subject to credit approval. Talk to a HomeTrust Bank Loan Officer for more program information.