Using Your Home Equity to Reduce Your Debt

Debt Management

Sometimes life happens. When you least expect it, a financial need arises that can leave you and your family scrambling. Or perhaps you desperately want to pay down your existing debt. While there are many options to borrow money, some are more costly than they are worth.

If you’re a homeowner, one option at your disposal is a home equity loan. While loans, in general, can be tricky, a home equity loan is an excellent option for many circumstances.

If you are interested in using a home equity loan, call the knowledgeable professionals at TwinCity Lending. We have years of experience working with a variety of customers. We work hard to keep overhead costs down so that we can pass the savings on to you.

What is a Home Equity Loan?

home equity loan, also called a second mortgage or a home equity installment loan, is a way to borrow against the portion of your home’s value that you own. Your available home equity is the difference between the total value of your home and how much you still owe. A homeowner builds equity in their home by making payments on their mortgage, improving the home, and keeping the house as it increases in value.

Homeowners can use home equity loans for many things. Whether you want to remodel part of your house, pay down debts, such as credit cards or student loans, or to make another large purchase, like a car, a home equity loan provides you with available capital. Interest on a home equity loan may be tax-deductible, as well, depending on your circumstances.

Reasons to Use a Home Equity Loan

Shopping Bill

Home equity loans are a fantastic way to obtain money at an affordable interest rate. Many people wonder if you can use a home equity loan for any purpose. The answer is generally yes, but you should take care when borrowing against your home’s equity. Overuse of this type of loan was a leading factor in the Great Recession.

Consolidate Debt

A common reason to take out a home equity loan is to consolidate debt, particularly high-interest debt. Many homeowners still have a significant amount of student loans they are still paying off, or maybe have built up credit card debt. Frequently, these rates can be very high, up to 15-28%.

If you use a home equity loan, you could save yourself thousands of dollars in interest and use those savings to pay down the principal amount. Even though home equity loans typically come with a higher rate than your initial mortgage, they are usually less than double-digit rates attached to credit card debt.

Home Improvements

Another common reason to take out a home equity loan is to make improvements that add value to your home. The increase in your home’s value tends to help you recoup a significant portion of the initial investment in the home improvement.

For example, a reasonable kitchen remodel in line with the value of the home can return about 70% of the investment in the increased value of the house. Upgrading your home’s exterior can add almost 80% of the cost back to your home. Using a home equity loan to make energy-efficient updates to your home will not only add value but also save you money on utilities and, in some cases, give you a tax break

Emergency Expenses

Another common reason to use a home equity loan is for an unforeseen expense. Many families don’t plan for substantial medical costs, job loss, or other situations that require a large amount of capital at once. A home equity loan can give you a significant amount of money to pay for these unexpected events and provide you with peace of mind.

How does a Home Equity Loan Work?

Buy House

You might be wondering how a home equity loan works. You know you can use this loan for several different things, but how? Similar to a first mortgage, a home equity loan is for a specific amount and a fixed rate that is scheduled to be paid back over time. The borrower will get a lump-sum amount with an agreement to make regular payments for a specific time period.

The amount for the loan depends on how much of your mortgage is paid off. The lender will divide the total amount you have left to pay on your mortgage by the value of the property. This amount is the loan-to-value ratio, and generally, lenders want this ratio not to exceed 90% after the new loan is factored in.

To put it in practical terms, if you own a home that is worth $400,000 and you have $200,000 left to pay in your mortgage, you have $200,000 in home equity. If you wanted a lump sum of $100,000, that would be a 75% loan-to-value ratio.

Tips for Home Equity Loans

Use The Money Wisely

While it may be tempting to take out a home equity loan to purchase a nice car, or to complete substantial improvements to your home, you need to be wary of how much you spend. Do not make a large purchase you can’t afford. This may mean using the loan to purchase a reasonable car, rather than a luxury one.

Also, don’t make home improvements you will not recoup when you sell. If you invest $80,000 into a kitchen in a $250,000 home, you will not get that investment back because potential buyers won’t want to spend that much on an updated kitchen that doesn’t match the rest of the house.

Be Aware of Fraud

As with anything in life, there is a potential for fraud with home equity loans. Do not fall for a scam. If the offer seems too good to be true, it might be. The best option is to seek out a reputable mortgage lender, rather than falling for a television ad. Look up the company with the Better Business Bureau, or read their Google reviews.

Thoroughly read through all documents before you sign anything. It is perfectly acceptable to have an attorney read through legal documents before signing. Disreputable lenders have manipulated people into signing over the rights to their house without realizing it.

Call TwinCity Lending Today

If you are interested in a home equity loan, give TwinCity Lending a call today. We specialize in low-interest loans, especially for borrowers with good to excellent credit. Our goal is simple: keep overhead costs down and save our clients money. Find out how we can serve you and your borrowing needs.

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