The longer you make payments toward your mortgage across the loan term, the more equity you'll build up in your home.
If you have other outstanding loan amounts or lines of credit dragging down your credit score and causing financial difficulties, it might be tempting to use home equity to pay off debt. But is it wise to do so?
This guide will help you consider whether using home equity to pay off debt is a good idea for your financial situation.
Home equity is your ownership stake in your property. You build up equity by making a down payment, improvements that increase the value off the home, and regular mortgage payments.
For example, if your house is worth $500,000, and you’ve paid off $250,000, then you have 50% equity in the property. The lender has the other 50% stake. Home equity is, in effect, a kind of cash reserve you can sometimes dip into through various home equity loans, investments, and lines of credit.
Yes, you can use home equity to consolidate debt. This can increase your cash flow on a monthly basis and help rebuild credit scores.
Some examples of debts you can pay off with equity include:
Many people use equity to pay for home improvements, which also increases the market value of their properties. In this way, they build up equity while spending equity simultaneously: quite a handy personal finance trick.
When you contact a home equity investor, you sell the equity to them in exchange for cash. Alternatively, you can use your home equity as collateral for a loan from a different lender (or from your same mortgage lender if you are on good terms with them).
Regardless, you can use your home equity to pay off debt in a few different ways:
Any of the methods listed above can potentially allow you to use the equity in your home to pay off various debts, like credit cards, personal loans, student loans, medical bills, and more.
While there are a few cons of using home equity, these are generally minor compared to the penalties for missing high-interest credit card payments or making other poor financial decisions.
While using home equity to pay off your debts is possible, you may wonder whether you should. There are a few times when it might be a good idea to use home equity to pay off debt.
If you have a lot of home equity because you have been making regular mortgage payments for several decades, all that money can be put to work to pay off your existing debt.
You can always build equity back up again, but the regular debt will drag on your credit score and negatively impact your finances, this strategy may be one of the best ways to maximize your financial health in the short term and long term at the same time.
If you need to pay off a debt quickly, home equity could be a solution. If you use a cash-out refinance to get a lump sum based on your house's equity, for example, you can pay off an immediate medical bill or other debt that would otherwise result in financial catastrophe.
Generally speaking, it's only a good idea to use home equity to pay off debt if the equity in your house can cover your debt amount.
Using equity to consolidate debt can show as a green flag to future lenders because consolidation can both lower your debt to income by lowering your monthly obligations and help build credit. This is one of the most significant pieces of advice a credit counseling specialist will give you.
By paying off your debt, if you go to refinance or get other loans in the future, you can qualify for better loans.
Ultimately, using home equity to pay off debt could be a very smart idea, although it depends on the circumstances and what kind of debt you need to pay off. However, if your mortgage payments themselves are too high for comfort, Balance may be able to help.
With Balance’s homeownership program, we’ll replace your mortgage loan with an equity investment. Then, all you’ll have to worry about is a single monthly payment to us that covers your share of the monthly expenses and occupancy fee.
Once your finances are stable, you’ll retain the option to buy us out and refinance back into a traditional mortgage, or sell the property. Many homeowners have already taken advantage of this option to help reach more stable financial grounds. Balance gives homeowners the flexibility and chance to consolidate their debt, catch up on finances, repair their homes, and build up their credit and financial health.
Contact us today and learn more.