A home equity loan, a home equity line of credit (HELOC) or a cash out refinance allow consumers to access the equity in their homes by borrowing against it. The loan amount is based on the difference between the current market value of the home outstanding mortgage balance.

Typically you are allowed to borrow up to 80% of the equity in the home which can be an appealing way of paying off high interest credit card debts as home equity loans tend to have a lower interest rates. Home equity loans and cash out refinance tend to be fixed-rate, home equity line of credit generally have variable interest rates.

Let’s say you purchased your home for $450,000 and you owe $325,000 on your primary loan. If your new appraisal comes in at $500,000, you could potentially take out a HELOC for $140,000 ($500,000-$325,000 = $175.000 & $175,000 x .80 = $140,000).

They key thing to understand is that you are putting up your home as collateral to secure the loan, this could be a good option for debt consolidation. While this is one of the advantages of owning a home, it is important to understand liens and Loan to Value ratio

Before opting for this option, you should check the local laws in your state carefully before considering a home equity loan as a vehicle to consolidate unsecured credit card debts as you could potentially be placing your home at risk of foreclosure. In some states, the process of foreclosure can take few months while in others in can take much longer to provide you with some time to become current on your payments and avoid the process all together.



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