Can Your House Really Help You Get Out of Debt?

real estate

A house is many things: a place to live, a place to work, a place to relax, and a place to raise a family. But a house is also, for many people, the single most valuable asset they will ever own.

We tend to think of houses as being the kind of asset that will pay dividends years down the road, when it comes time to retire, perhaps, or in the event that you need to downsize to a smaller place. But the truth is that from day one of the mortgage, the homeowner owns a substantial amount of equity in the property. This equity can be used for a variety of purposes.

One of the most common of these is paying down loans. It’s no secret that American families are struggling with unprecedented amounts of unsecured debt from credit cards and payday loan companies, much of which has been borrowed at extremely high interest rates.

Even a couple of missed payments can mean cause this debt to spiral out of control as interest compounds, and families that have been hit hard by the coronavirus recession may be facing down a fiscal time bomb that, if not defused, will destroy their earnings, investments, and assets.

The good news is that homeowners can nip this debt in the bud and get out of the cycle using home equity to secure a debt consolidation loan.

How Does a Home Equity Loan Work?

A home equity loan is special kind of financial instrument that allows you to borrow against the value of your house through a mortgage broker like Burke Financial that specializes in residential mortgages.

You can think of it this way: if you still owe $250,000 on your mortgage, but the house itself is worth $400,000, you essentially own $150,000 of equity in the property — this is how much you would have if you sold the house tomorrow and paid off the rest of your mortgage.

In today’s booming housing market, housing prices have been rising steadily, which means that even if you only bought your property a few years ago, you’ve likely generated a considerable amount of equity simply through the forces of the market.

Home equity loans allow you to put that money to work for you today. You will need to pay it back, of course, but because it is a secured loan back by an asset (your home), the interest rate will be considerably lower than an unsecured loan would be.

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The Advantages of Using Home Equity for Debt Consolidation

According to recent statistics, the average American owes $6,194 in credit card debt. Given how high interest rates tend to be on unsecured loans, paying back this amount of money on a fixed salary can be very difficult, especially if you have other significant expenses. It will take careful budgeting, and a significant part of the money you pay each month will simply go to covering interest.

A home equity loan allows you to consolidate all of this debt into a single payment at a much lower rate, meaning that you will have lower monthly payments and save more money in the long term. It can also help you to start repairing your credit score.

The best way to use home equity to finance a debt consolidation loan is by contacting a mortgage broker that specializes in home equity loans and second mortgages for debt consolidation — they will be able to help you connect with a range of potential lenders, and find you the best deal for your needs.

Debt is endemic in modern America, but if you’re a homeowner, your house may help you turn toxic debt into manageable debt, helping you keep your head above water as you make your way toward a debt-free future.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.