Pay Off Debt With A Home Equity Loan or Line of Credit (HELOC)

Consolidate Debt with a Home Equity Line

By Mark Barnes

Direct Lending Solutions Staff Writer

With the expensive holidays behind us, and tax season upon us, many people begin to feel the pain of excessive debt and financial burden. Did you know that your home's equity is an excellent way to pay debt, and even pay your federal taxes?

A home equity line of credit, or HELOC, is one of the most overlooked tools, when it comes to eliminating debt. New research indicates that the average American has over $9,000 in credit card debt. At 17% interest and rising minimum payments, this can be devastating to your personal financial situation.

Although adding to the monthly minimum payment on credit cards is a great strategy, another, oftentimes wiser, way to crush credit cards and other monthly debts is by paying them off with a home equity line of credit. An equity line, or HELOC, is a home loan that uses the existing equity in your property. In other words, if you have a first mortgage balance of $100,000, but your home is valued at $150,000, you have $50,000 in equity available to use.

This equity is one of the most powerful financial tools you'll ever have. Here's why. Equity loans have much different terms than standard mortgages. For example, most HELOCs have interest rates based on the Prime rate, which is lower than a 30-year mortgage rate. And, best of all, most HELOCs are offered with an interest-only payment. This means you can take that $50,000 from your home and have a very small monthly payment -- likely hundreds less than whatever debt you pay, using the money.

For example, if the Prime rate is 5%, you could take a $50,000 home equity line of credit, and you would pay just $208 per month. Consider paying off a $25,000 car, for which you pay $400 monthly. You pay a college loan with a $10,000 balance and monthly payment of $150. Then, you pay off $15,000 worth of credit cards, with minimum payments totaling $350.

That's $900 in monthly payments that disappear, when you pay them off using your HELOC. With your $208 interest-only payment o n the HELOC, you save $692 every month and $8,304 per year.

Some people shy away from this transaction, because they don't like interest-only payments, fearing the $50,000 debt will never be eliminated and that all of the equity in their homes is gone. This is a short-sighted view. First, with standard home appreciation, your home's value will increase immediately. Second, you can pay on the principal of your HELOC anytime you wish, but it's not really necessary.

When you want to get rid of the equity line of credit, you'll either sell your home to pay it off, or you will refinance your mortgage in a few years to a new rate and term, paying off the HELOC with your new first mortgage.

Meanwhile, while you're waiting for your home's value to increase, you have close to $700 every month to use for vacations, home improvement or to invest. And this money, in most cases, is tax deductible; credit card and automobile loan interest payments are not!