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Home Equity Loans for Debt Consolidation – What to Consider

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If you need money fast, a home equity loan might be a good option. A home equity loan can provide you with a lump sum of money in a matter of weeks; the borrowed amount can then be paid off on a monthly basis for a fixed rate. It can be especially helpful to use this type of loan to help consolidate your current debt. A home equity loan can combine debt from various lenders, such as different credit card companies, and place it into one convenient payment.

However, a home equity loan might not always be the best option for everyone. It’s important to understand how it works before making a final decision. This guide will help you learn what a home equity loan is, how it can be used, and how to qualify for one, so you can decide whether this loan product fits into your financial plan.

What is a home equity loan?

A home equity loan allows you to borrow money from a lender (usually a local bank) and uses your house as collateral for repayment. The interest rates can either be fixed or variable with a set repayment term of usually around 10 to 15 years.

“Home equity loans allow you to take out a lump sum up to a maximum percentage of the home’s value,” said Demond Johnson, a loan officer with Guild Mortgage based near Fort Worth, Texas. While the borrowed loan amount varies by each lender, it usually doesn’t reach over 80%.

You can use this loan for just about anything. However, it’s usually best when used toward an investment that will help you in the long run, like consolidating your current debt, and not used on something frivolous, like a luxurious vacation. Remember: You will need to pay this loan back — if you don’t, your house can go into foreclosure.

Pros and cons of a home equity loan

It’s important to understand the pros and cons of a home equity loan before considering applying for one. Consider the following.

Pros

  • It may be your cheapest option: Home equity loans typically have lower rates than a credit card or other loan product, said Johnson.
  • You may have a lower tax liability: The interest on home equity loans may be tax deductible.

Cons

  • You could lose your home: Home equity loans might not be a great option for those with poor spending habits. Since your home is on the line, these loans are best suited for disciplined borrowers who won’t miss payments.
  • You may accumulate more debt: Even though you’re consolidating your debt, you’re not debt free. Those who overspend and are not smart with their finances can continue to rack up more debt as time goes on, causing an even heavier financial burden than before.
  • You could misuse loan funds: A home equity loan can be used for just about anything, and that may be problematic for borrowers with poor spending habits. You may, for instance, want to pay for an upcoming vacation or wedding, but that will only result in more future debt without any return on your investment. Home repairs or renovations are a better use of funds, as they can increase your property value.

Using a home equity loan to consolidate debt

There are many solid reasons why someone might want to use a home equity loan to help consolidate debt.

Johnson said it makes sense to use this type of loan to help consolidate high interest debt such as with various credit cards because “the savings can be significant.” Using home equity loans to pay off other debts, such as student loans might also be wise, said George Burkley, owner of American Mortgage & Financial Services in Indiana — “[the] rates are usually much lower.”

Burkley also stated that if you’re looking to do home renovations or repairs on the house, or are interested in buying a second home, a home equity loan might be a good option to consolidate that debt, as opposed to using a credit card.

How to qualify for a home equity loan

When applying for a home equity loan, there are a few things a borrower will need to consider in order to qualify.

Collateral

Borrowers will need to have substantial collateral. For a home equity loan, your house is the collateral. If you can’t make the payments each month, the lender can take away your house.

Credit score

Lenders usually look at your credit score when you qualify for any type of loan, and a home equity loan is no different. A borrower’s credit score can play a significant role when qualifying for a home equity loan. Johnson said borrowers usually need a 680 (or higher) FICO score to qualify, but scores can vary depending on each lender.

Equity

A borrower’s equity can help determine how much funds can be borrowed with a home equity loan. According to Burkley, equity usually cannot exceed “over 85-95% of what the house is worth.”

Debt-to-income ratio

Lenders will look at your income and current debts, such as credit cards, current mortgage, and student loans, to determine whether you’re able to take out a home equity loan. Lenders want to ensure you can pay back your debt so if you already have a substantial amount, you may not be an ideal candidate. Burkley said borrowers should have around a 40% to 45% debt-to-income ratio to qualify for a home equity loan.

Where to find home equity loans

A home equity loan might be a good option for you. If you’re looking to find a loan, LendingTree might be able to help. With its online marketplace, you’re able to use one form to potentially be matched with up to five offers from lenders at once. First choose the type of property you need the home equity loan for, such as a condo, single family home or a townhouse. Then finish completing the form by adding your personal information and you’ll instantly receive offers available to you.

LendingTree also has a convenient home equity calculator that can help determine the estimated amount you’re eligible to borrow. This can help you to decide whether a home equity loan might be useful for your financial needs or if another option might be more efficient.

What to consider as you shop home equity loans

When searching for home equity loans, there are a few important aspects to keep an eye on. Here are a few of the most common aspects to watch out for.

  • Interest rates: Rates vary from each lender. It’s important to compare interest rates with all lenders to ensure you get the best possible rate for your financial needs. Keep in mind, some lenders are more likely to provide lower interest rates to those with excellent credit.
  • Origination fees: Some home equity loans can come with fees, such as origination fee that is applied when processing the loan.
  • Prepayment penalties: Lenders can also charge a prepayment penalty for when you want to pay off your loan early. It’s important to check with each lender to see which fees are tacked on.
  • Lenders: Search for a lender you feel most comfortable working with. You want to be able to actively discuss your financial needs with a lender so you can learn how their offers will fit for your budget and your lifestyle.

Home equity loan vs. HELOC: What’s the difference?

A home equity loan and home equity line of credit (HELOC) have a few similarities. For example, they are both backed by the equity in your home. The borrowed amount is also based on your home equity, which is normally around 80% to 90%.

However, there is a distinct difference between these two financial products: While a home equity loan provides funds in one lump sum, a HELOC is a revolving account. With the latter, you’ll be able to take out money you need during a certain time frame.

Johnson said it’s a good idea to consider a HELOC as “a VISA with a very large limit.” You’ll be charged interest on the money you borrow, and you’ll be able to pay off the HELOC and charge more to the account in the future.

However, Johnson warned that rates can change on a HELOC. That is something to consider when determining whether a HELOC is right for you.

Alternative ways to consolidate debt

Using a home equity loan to consolidate your debt might be the best option for you. However, there might be something else out there that’s an even better fit. To determine which is the best for you, it’s always smart to learn about all offerings so you get exactly what you need.

Debt consolidation loan vs. home equity loan

A debt consolidation loan (which can also be a personal loan) might be a good option for those who have a lot of debt from various lenders. Instead of paying a high-interest rate to each lender every month, you can consolidate the monthly payments into one lump sum. Often times, these rates can be much lower than what you were paying before.

Lenders usually look at your credit score for both a debt consolidation loan and a home equity loan. However, sometimes lenders can be more lenient with debt consolidation loans in terms of your credit score; oftentimes, borrowers can have less than stellar credit and still be approved for a personal loan or debt consolidation loan. However, those with excellent credit will be more likely to obtain lower interest rates with debt consolidation loans than those who have fair to poor credit.

And unlike home equity loans, debt consolidation loans don’t use your home as collateral, so you won’t have to worry about losing your home to the lender even if you can’t make payments. Find the best debt consolidation loans with our table below!

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5.99%
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24 to 60

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Varies

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Balance transfer card vs. HEL

A balance transfer card with a promotional 0% APR can be ideal for those with high-interest credit card debt. However, qualifying for a credit card with a low balance transfer rate and promotional APR can be difficult.

While a home equity loan can be used to consolidate a variety of different debt, including home repairs, a balance transfer is strictly used for credit card debt.

Some balance transfer cards don’t come with a transfer fee, especially for those borrowers with excellent credit. However, many cards charge a fee equal to a certain percentage of your balance.

Home equity loans can sometimes allow borrowers to combine a larger amount of debt than with a balance transfer. However, a home equity loan requires you to have equity in your home. As a result, some homeowners may find that they don’t qualify for this type of financing.

A home equity loan can be a great option when you need money fast for debt consolidation, such as combining credit card debt or other debt accumulated by home renovations and repairs. But these types of loans aren’t always the best fit for everyone and should be well-considered before making a decision.

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The Fastest Way to Pay Off $10,000 in Credit Card Debt

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

Before you read on, click here to download our FREE guide to become debt free forever!

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Updated – January 10, 2019

Digging out of credit card debt can feel frustrating, intimidating and ultimately impossible. Fortunately, it doesn’t have to be any of those things if you learn how to take control.

Paying down debt is not only about finding the right financial tools, but also the right psychological ones. You need to understand why you racked up credit card debt in the first place. Perhaps it was a medical emergency or a home repair that needed to be taken care of immediately. Maybe you’d already drained your emergency fund on one piece of bad luck when misfortune struck again. Or maybe you’re struggling with a compulsive shopping problem, so paying down debt will likely result in you accumulating more until the addiction is addressed.

You also need to understand what motivates you to succeed. Do you want to pay down your credit card debt in the absolute fastest amount of time possible that will save more money or do you want to take some little wins along the way to keep yourself motivated?

Here’s a couple strategies consider as you learn the best way to handle credit card debt — and pay it off quickly.

2 common credit card debt repayment strategies

These repayment strategies can help you pay off credit card debt quickly. Keep in mind, you can use these strategies even for non-credit-card debt:

  • Debt avalanche: Focus on paying off the credit card with the highest interest rate first. Then, work your way down. This strategy can save you money on interest and get you out of debt sooner.
  • Debt snowball: Pay off your smallest debts first. Doing so can motivate you to continue making payments as you climb out of debt.

You don’t necessarily need to pick the repayment strategy that gets you out of debt the fastest. After all, if your repayment strategy doesn’t keep you motivated, you may not stick to it.

Using a personal loan or balance transfer credit card

As you seek to repay your debt, you could consider a personal loan or balance transfer credit card with a lower interest rate than on your existing debt. Transferring your debt to one of these financial products could help you reduce long-term interest costs.

But you’ll first need to learn whether or not you’re eligible. Your credit score will play a big role in determining your eligibility for a personal loan or balance transfer card. Use our widget below to figure out if a personal loan or a balance transfer is the best option for you!

What’s the best option for me?

Please enter information below and we’ll provide the best option to consolidate your credit card debt!

If you have a credit score above 640, you have a good chance of qualifying for a personal loan at a much lower interest rate than your credit card debt. With new internet-only personal loan companies, you can shop for loans without hurting your score. In just a few minutes, with a simple online form, you can get matched with multiple lenders. People with excellent credit can see APRs below 10%. But even if your credit isn’t perfect, you might be able to find a good loan to fit your needs.

Not sure what your credit score is? Click here to learn how and where to find out. If you know your credit score needs some work but not sure of what can be done, click here.

If you have a score above 700, you could also qualify for 0% balance transfer offers. We will talk more about balance transfers below but this option is the best way to pay off credit card debt if you’re able to qualify for a 0% APR balance transfer credit card.

A credit score of less than 600 will make it difficult for you to qualify for either option. If you have a credit score less than 640, struggling to make monthly debt payments and would like to explore your options to reduce your debt by up to 50%, then please click our option below to customize a personal debt relief plan.

Custom Debt Relief Plan

Now let’s talk about the financial tools to add to your debt repayment strategy in order to dig out of the hole.

Let’s say you have $10,000 in credit card debt, and are stuck paying 18% interest on it.

You already know that putting as much spare cash as you can toward paying down your debt is the most important thing to do. But once you’ve done that, so what’s next?

Use your good credit to make banks compete and cut your rates

You could save $1,800 a year in interest and lower your monthly payments based on several of the rates available today. That means you could pay it off almost 20% faster.

Here’s how it works.

Option One: Use a Balance Transfer (or Multiple Balance Transfers)


If you trust yourself to open a new credit card but not spend on it, consider a balance transfer. You may be able to cut your rate with a long 0% intro APR. You need to have a good credit score, and you might not get approved for the full amount that you want to transfer.

Your own bank might not give you a lower rate (or only drop it by a few percent), but there are lots of competing banks that may want to steal the business and give you a better rate.

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Annual fee
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Intro Purchase APR
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Intro BT APR
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Balance Transfer Fee
3%
Regular APR
14.24% - 25.24% Variable
Rewards Rate
5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate, 1% unlimited cash back on all other purchases - automatically.
Credit required
good-credit
Excellent/Good Credit

MagnifyMoney regularly surveys the market to find the best balance transfer credit cards. If you would like to see what other options exist, beyond Chase and Discover, you can start there.

promo-balancetransfer-halfIt also has tips to make sure you do a balance transfer safely. If you follow them you’ll save thousands on your debt by remaining disciplined.

You might be scared of a balance transfer, but there is no faster way to cut your interest payments than taking advantage of the best 0% or low interest deals banks are offering.

Thanks to recent laws, balance transfers aren’t as sneaky as they used to be, and friendlier for helping you cut your debt.

Sometimes the first bank you deal with won’t give you a big enough credit line to handle all your credit card debt. Maybe you’ll get a $5,000 credit line for a 0% deal, but have $10,000 in debt. That’s okay. In that case, apply for the next best balance transfer deal you see. MagnifyMoney’s list of deals makes it easy to sort them.

Banks are okay with you shopping around for more than one deal.

Option Two: Personal Loan

If you never want to see another credit card again, you should consider a personal loan. You can get prequalified at multiple lenders without hurting your credit score, and find the best deal to pay off your debt faster.

Personal loan interest rates are often about 10-20%, but can sometimes be as low as 5-6% if you have very good credit.

Moving from 18% interest on a credit card to 10% on a personal loan is a good deal for you. You’ll also get one set monthly payment, and pay off the whole thing in 3 to 5 years.

Sometimes this may mean a higher monthly payment than you’re used to, but you’re better off putting your cash toward a higher payment with a lower rate.

And you’ll get out of debt months or years faster by leaving more money to pay down the debt itself. If you want to shop for a personal loan, we recommend starting at LendingTree. With a single online form, dozens of lenders will compete for your business. Only a soft credit pull is completed, so your credit score will not be harmed. People with excellent scores can see low APRs (sometimes below 6%). And people with less than perfect scores still have a good chance of finding a lender to approve them.

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If you don’t want to shop at LendingTree, you can see our list of the best personal loans here.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brian Karimzad
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Brian Karimzad is a writer at MagnifyMoney. You can email Brian at brian@magnifymoney.com

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How to Manage Debt as a Single Parent in 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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When student loan deferment ended for Samantha Gregory, a single mom and founder of site Rich Single Momma, she had one reaction to her payments: sticker shock. “The amount they were asking for was so astronomical, it was bananas,” she said.

As a single mom in debt, these high payments were added to the already steep financial demands of covering household expenses and supporting her children, including one with special needs — all on one income.

Adding debt to the significant challenges of single parenting “puts a strain on not just your finances, but your emotions, your mental health,” she said. “It’s like, ‘I have this burden over my head so how am I going to take care of it and take care of my family?’”

It’s a question any single parent in debt may find themselves asking. There’s no one right answer, but the good news is that there are smart steps a single mom or dad can use to tackle debt. Here are some tested and certified strategies for how to manage debt as a single parent.

8 strategies for a single parent in debt

1. Keep debt on your radar

A key to managing money as a single parent in debt is to keep an eye on what you owe. Gregory warned against letting debt slip in your money management juggling act. “I know for me in the past, I’ve tried to ignore it and hope it would go away,” she said. “But it doesn’t go away. It’s still there, lingering.”

Keep your debts on your radar, so you’re not losing track of them, falling behind on payments or damaging your credit. If you don’t know what you owe, pull your free credit report and look up each outstanding debt you have and record the balance, interest rate, monthly payment and due date. Start a habit of reviewing these accounts regularly.

2. Work with your lender

Once you know what you owe, see if your lender offers any help or accommodations that can make this debt easier to manage.

You’ll have the most options for dealing with federal student loans, as servicers must provide you with options to forbear or defer payments, or switch to a different repayment plan.

Even for other types of debt, it can’t hurt to ask your lender if they’re willing to work with you. They might be open to giving you an extension on your payment, and some lenders will let you skip a payment now and tack it onto the end of your repayment period instead.

3. Claim benefits and support

Help isn’t always easy to come by as a single parent, so make sure you’re claiming the benefits and child support to which you’re entitled.

Federal assistance programs such as Women, Infants and Children (WIC), Supplemental Nutrition Assistance Program (SNAP) and school lunch programs can ease pressure on your budget while keeping everyone fed, for example. Other programs can assist with fixed monthly costs such as housing, child care or health insurance. Many state and local programs can offer additional help.

Single parents should also consider filing for child support. If you’re already entitled to such payments but the other parent isn’t paying, or you feel it’s not enough, consider pursuing legal steps to get adequate support for your family.

4. Revisit your budget

As a single parent with debt, living within your means is the foundation of your financial security. Review your budget to see if there are areas you’re wasting money on things you don’t need or use, whether it’s a neglected gym membership or a house you’re realizing is roomier than necessary. Consider lifestyle changes and sacrifices — big or small — that you could make to lower your monthly costs.

Look for ways to free up some of the mental space you’re using for your money, too, Gregory suggested. She likes to automate payments, for example, to ensure they’re going out on time with less effort on her part.

5. Sell your extra time and stuff

To the single mom in debt, Gregory suggested looking for ways to generate some extra cash. “I’m a firm believer in side hustles,” she said. “There are so many options out there available to create a side hustle, start a business or just get another part-time job or work-from-home job.”

Then, “look around your house and if you have something valuable you can sell, sell it,” she said. Doing so can bring a fast cash infusion that can help you stay current on debt payments, or even make an extra payment.

It can be a tough and even emotional to sell some belongings, Gregory acknowledged. But, “It’s just things and they’re replaceable, whereas your peace of mind, your family and kids, and your health are not replaceable,” she said.

6. Make extra debt payments

If you can carve out extra savings, that’s money you can use to pay off your debts faster. One method to do so is the debt snowball:

  • Figure out how much more of your monthly income you can afford to devote to making extra debt payments. Include this as a line item in your budget.
  • Put that extra cash toward your debt with the lowest balance, and make the minimum payment on all of your other debts.
  • Watch the balance on your high-priority debt decrease faster.
  • Once your first debt is gone, “roll over” the funds budgeted for your monthly payment and the extra payment and apply them to the next low-balance debt.

Making extra debt payments will lower your principal faster which will, in turn, lower your interest costs. As a result, this strategy could avoid hundreds of dollars in interest and shave months or even years off your debt repayment.

7. Consider debt consolidation

For a single parent, debt consolidation can be another way to get ahead. Consolidating debt makes the most sense when doing so will lower the interest rates you’re paying.

A credit card balance transfer is one way to accomplish this. You can open a credit card with a 0% introductory rate. Then, transfer existing balances to this new credit card (note that this will often incur a balance transfer fee) and you can repay this debt interest-free.

If you have higher debt balances or prefer a fixed repayment plan, a personal loan could be the way to consolidate debt. To do so, you can take out a new personal loan with the rates, term or payments you would prefer and use the loan funds to pay off and replace existing debts. You can compare various lenders with our debt consolidation comparison page to get an idea of the terms and rates for which you could qualify.

8. Tap your community for support

Managing debt as a single parent can be hard on you because, at the end of the day, paying them comes down to you alone. “In the back of your mind, you’re thinking ‘There’s no one who can help me with this,’” Gregory said.

However, you don’t have to go it alone — there are often people who are ready and willing to help as close as your own backyard. So let them! Family and friends can help you out in a variety of ways, from spotting you cash in a tight month to helping with child care. You can also get assistance from your church, community and local nonprofits or programs.

Even if you don’t always find the help you need right away, asking around can start you on the track to getting the recommendation or referral that leads you there. Gregory also suggested online communities, such as local or single-parent Facebook groups, as a way to crowdsource solutions and get connected with helpful resources.

Pass your debt and money lessons on to your kids

Debt can be a big regret for many single parents. “If I had more information when I was going to college, I wouldn’t have taken out so many loans,” Gregory said.

But these ideas for how to manage debt as a single parent can help you push past regret into action. In doing so, you’ll be creating the financial security that your kids need, all while modeling what good money and debt management look like in action.

Gregory, for example, used her experience with student debt to warn her daughter away from borrowing to pay for college. As a result, “She’s really blessed that she doesn’t have to take out student loans, so she won’t be saddled with that big debt when she graduates from college,” she said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
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Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here

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