21 Jul Should You Use Equity to Pay Off Debt?

You’ve heard of home equity, but should you use it to pay off debt? The good thing is that it has lower rates, more accessible assessment criteria, and tax-deductible interest. What about its cons, like potential fees, restricted use, and the possibility of losing your house? Lastly, is it everything it’s cracked up to be, and if so, how do you go about taking advantage of it?

Let’s discuss what home equity is, how you should use it, and whether it might be easier to consolidate all your debt into a single loan when you apply with Debt Refinance.

A Breakdown of Home Equity

First, let’s define exactly how using equity to pay off debt works. Home equity is the difference between the value of your home and the value of your mortgage. For example, if your home is worth R300 000 and you still owe R150 000 on it, your home equity would be R150 000. Essentially, it’s what you own in the house.

It’s an asset you can borrow to meet important financial needs like paying off debt. You can use it to back a home equity loan or line of credit.

You can have immediate access to your equity (the amount you can borrow) as soon as you make a down payment.

How Does Equity Grow?

It can grow as the money you owe on the mortgage decreases, as this is the portion of the home you own outright. Additionally, equity can grow as your property’s value appreciates or rises in value. In a similar fashion, it can decline as your property depreciates. You can calculate equity by deducting your loan balance from the value of your property.

Home equity= value of home – loan balance.

How to Borrow Against Equity

Luckily, the interest rates on home equity loans are typically lower than those of credit cards or personal loan interest rates. However, home equity can only be converted into cash slowly. That’s because equity is based on the appraisal (value assessing) of current market rates. Unfortunately, there’s no guarantee that your home could sell for that price.

Rather, you can leverage your home equity in various ways as collateral when securing loans. Sometimes referred to as a second mortgage, home equity allows you to borrow against your homes for a fixed rate over a fixed period. This is called a fixed-rate HELOC (home equity line of credit).

You can use HELOCs or lines of credit backed off by equity to take out large loans that can cover debts with higher interest rates. Rates on HELOCs are usually much lower since they’re backed by collateral if you default.

Should You Consolidate Debts Using HELOCs?

In the end, it’s up to you to assess the risks and rewards of using equity to consolidate debt. On the one hand, it has fixed and lower interest rates. Also, it may have less stringent lending requirements.

Of course, you might also lose your house if you can’t afford to pay your ‘second mortgage’ off. Fees might also apply when taking out HELOCs, increasing how much you owe overall. Moreover, in most cases, funds from equity loans must be used for a specific purpose, like paying debt or renovating your home. It’s sort of like paying off your debt with a credit card.

In contrast, consolidation loans offer low interest rates with the added benefit of extended repayment periods. Debt Refinance’s maximum consolidation loan amount is R350 000 to pay all your debt at once. You get all the benefits of borrowing against equity without the possibility of losing your house.

Take control of your finances with a debt consolidation today. Contact Debt Refinance to apply for your loan now.