Getting and Using a Home Equity Loan Debt Consolidation

One of the most popular methods of handling a debt consolidation is by using the equity in your home to secure a home equity loan that you can use to pay off all of your other bills in exchange for a "second mortgage." Once you have the home equity loan and have used it reduce debt in your life, you will only have to concern yourself with a new, easier to manage loan payment secured by your home.

What is Equity?

If you are a homeowner, your home, over time, builds up equity as its value increases and the amount you owe on the loan decreases. Equity is that amount or difference between what you owe on your house and what it is worth on the market. For example, if you paid $200,000 for your home 5 years ago and currently only owe $180,000 on the loan, while the market has improved your home's value to be appraised at $225,000, you can be said to have $45,000 in equity in your home. This equity is value to you from a variety of lenders who are willing to convert it into cash for your use in the form of a loan.

Getting a Home Equity Loan

Securing a home equity loan to reduce debt is one of the easiest ways to get debt relief through debt consolidation. Lenders, once you have received an appraisal of your home, will perform an in-house calculation to determine how much they can loan you based on your available equity (it will not be 100% under most circumstances). Most banks offer home equity loans at amounts up to approximately 80% of the value of the equity in your home. This gives them a "cushion" of safety to allow for market changes and other factors that may otherwise put the loan in an upside down value (the equity becomes worth less than what you owe). Home equity loans are offered, like mortgages, over a period of time ranging from 5 years to 30 years and usually there is no penalty for early repayment.

Using a Home Equity Loan

Once you have applied for and been approved for debt relief through a home equity loan, you will receive a lump-sum payment from the lender that is yours to use as you see fit (at this point, to reduce debt by paying off your other debts). Once free of the monthly payments of your other debts, you can take the money you were putting toward those debts and use them to pay off your home equity loan over time.