Use Your Home Equity for a Debt Consolidation Loan

Save Money and Strengthen Your Retirement Financial Plan with Home Equity Loan Refinancing

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If you own your own home and have credit card or other high interest debt, you should strongly consider a debt consolidation loan – using equity from your home to pay off other debt.

There are at least three methods of taking cash out of your home worth consideration:

Home Mortgage Refinancing

This kind of loan involves resetting the terms and conditions of your first mortgage. As a debt management solution, you will typically generate cash to pay off other debt by increasing the size of the first mortgage at a lower interest rate and perhaps extending the term of the loan. It may even be possible to maintain or lower your monthly payment.

Home mortgage refinancing is usually sensible when available interest rates fall below your current mortgage interest rate. The benefit to you is that you can lock in a lower interest rate, extend the term of your mortgage if you wish and potentially take out cash for debt consolidation.

Home Equity Loan: Second Mortgage or Home Equity Line of Credit (HELOC)

Home equity loan refinancing is often structured as a second mortgage on your property. You borrow the money against the home equity you’ve built up, and use these funds to pay off all credit cards, car payments or any other outstanding bills.

A home equity line of credit differs: instead of taking a lump sum of cash, you open a line of credit, secured by your home, which you don’t make payments on until you use it.

The interest on both of these loans is not only usually lower than credit card debt, but also most often tax deductible.

Reverse Mortgages, a.k.a. the Home Equity Conversion Mortgage (HECM)

Reverse home mortgages are worth considering for seniors aged 62 and above who have a lot of equity and a low mortgage balance. They can be used to generate cash or increase income.

There are no regular payments to service the debt and foreclosure risks are nearly nonexistent as is this case with other types of loans secured by your home.

These are a few of several benefits of the HECM. (Learn more about a reverse mortgage here.)

Cash from Your Home Equity Loan Refinancing Pays Off Debt and Saves Money

In most cases, mortgage refinancing or taking out a home equity loan will save you money because debt consolidation mortgage loans usually offer a comparatively low interest rate – presumably a much lower interest rate than you are paying on your other debt.

You can significantly reduce your overall monthly spending by using your home equity to arrange debt consolidation. Pay off your high interest debt with your home equity.

Furthermore, depending on your situation, the interest on your debt consolidation refinance may be fully tax deductible – saving you additional money on taxes.

The Effects of a Bigger or Second Home Mortgage on Your Retirement Financial Plan

While not ideal, a bigger home mortgage or a second mortgage is most often far preferable to carrying higher interest debt.

The Federal Reserve Survey of Consumers showed that 24.7 percent of households headed by someone age 65 to 74 had mortgage debt in 1995. That number grew to 32 percent in 2001. The baby boomers – those ages 46 to 64 now – have pushed that trend even further. Consumers owed $766.2 billion in home equity loans and lines of credit by the second quarter of 2004 – double the amount they owed in 1998, and over $1 trillion by 2010, according to data from the Fed.

However, it is important to note the disadvantages of using mortgage refinancing to consolidate debt. As a result, you may end up carrying mortgage debt into retirement and therefore:

  • You may not be able to take full advantage of the mortgage interest tax deduction, because of lower fixed income in retirement.
  • You decrease financial flexibility if you have a larger fixed monthly mortgage cost – although your total interest payments after debt consolidation would likely be lower.
  • Your mortgage debt will limit your ability to tap into your home's value through a reverse mortgage.

Cautionary Debt Consolidation Facts:

  • Loan default means you could lose your house: There is one potential and significant drawback when you borrow against your house to pay off other debt. If you default on your home equity loan payments, you may lose your home.
  • Stay out of debt: If you consolidate your debt – be vigilant about not running up your balances again. You may be saving money with debt consolidation loan refinancing, but you likely need that money for day-to-day living expenses and you still have the one consolidated loan payment to make every month.

Other Terms and Types of Mortgage Refinancing

Refinancing your home to reduce overall debt is also referred to as:

  • Debt remortgage
  • Home equity loan refinancing
  • Debt consolidation mortgage loans
  • Consolidation loan
  • Debt consolidation loan refinancing mortgage
  • Home mortgage refinancing
  • Home equity loan refinancing
  • Home equity conversion mortgage
  • Debt consolidation refinance
  • Debt consolidation mortgage loans

Get Ideas for What to Do
About YOUR Debt...

Use the Retirement Calculator to find out: the pros and cons of paying off your debt and personalized options for how to do that...