Can I Use A Home Equity Loan For Debt Consolidation
Yes, you can consolidate your debts and pay them off with a home equity loan. Most lenders wont ask what youre using the money for, but some may require that it only be used for certain expenses, such as home renovations. If thats the case, then youll have to find another way to consolidate your debts, such as through a personal loan.
If it is allowed, youre in luck. Home equity loans often have lower interest rates than other types of debt consolidation, which will make monthly payments easier.
Paying off your credit cards and other debts by merging them into a single debt thats paid off by a loan or debt management program is an effective way to avoid high-interest credit card debt. Debt consolidation lowers the interest rate on your bills and is something you can do yourself with a large enough loan to pay off the cards with the highest interest rates first.
You can use a home equity loan to consolidate multiple credit card balances into one monthly payment with a lower APR for long-term savings.
Just be sure you want to do it with a home equity loan. The loan will increase your debt and requires making monthly payments. If you cant limit your spending and rack up more debt, you could be in a worse position than you were before taking out the loan.
Your home is also the collateral for the loan. This is good news in one sense: a secured loan often has a lower interest rate than other types of loans, including credit cards.
What Is A Purchase Mortgage Loan
A purchase mortgage loan can help you buy a house or another piece of real estate. In most cases, a mortgage has a fixed interest rate and gets paid off over 15 to 30 years. To obtain a purchase mortgage loan, lenders typically require you to put down at least 3% of the total price of the home. You will then use the purchase mortgage loan to pay off the remaining price to purchase your new home.
To see what your current income and expenses allow you to afford for a new home, use our home affordability calculator.
Principal, Interest, Taxes, Fees, and Insurance
When you take out a purchase mortgage loan, your monthly payment will often be comprised of five parts:
- Principal: The total amount of money you borrowed to buy the home.
- Interest: The price you pay, in addition to the principal to borrow the money for as long as you have the loan.
- Taxes: The property taxes you pay as a homeowner.
- Fees & PMI: Insurance for the home loan that you are required to purchase to cover any potential default against the purchase mortgage loan.
- Home Insurance: Insurance to protect the homeowners new home from unexpected expenses.
If you want to see what the total monthly payments will be for a mortgage loan, enter your home price and budget available for a down payment in our mortgage payment calculator.
Pre-Approvals
A loan you can take out against an already mortgaged home is known as a second mortgage
Different Types of Purchase Mortgage Loans
Home Equity Takes Time To Build
If youre a new homeowner, you might not yet have enough equity in your home to borrow from, says Ryan Greiser, owner and certified financial planner at Opulus, a financial advisory firm based outside of Philadelphia.
Equity is the amount you owe on your home subtracted from its current value. Building it can take years, depending on how quickly you pay down your mortgage and how much your home value increases.
» LEARN MORE: How a home equity loan works
Lenders typically let you borrow up to about 80% of your equity with a home equity loan.
The amount you get with a personal loan, on the other hand, is often based solely on your creditworthiness and finances. These loans are available in amounts up to $100,000, but youll need strong credit and low debt compared to your income to qualify for the largest loans.
Both personal and home equity loans come in lump sums, so having a good idea of how much you’ll need before you apply is important. You cant easily go back and borrow more if you misjudge.
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What Is A Second Mortgage
A home equity loan is one example of a second mortgage. You might be wondering why someone would want a second load of debt to pay back. Mortgage rates tend to be much lower than other products like or personal loans because youre putting your home on the line to borrow the money, so theyre a less expensive type of loan overall.
Some borrowers use second mortgages to pay for renovations on their homes or other major expenses like college tuition.
How Do You Choose The Best Home Equity Loan
Choosing the best home equity loan will require you to do a bit of research. In order to get the best terms and interest rates, be sure to compare different lenders loan programs and fee structures.
Lenders can have different requirements for qualification and offer different terms for home equity loans. If you have a higher DTI or lower credit score, youll find that some lenders are more likely than others to offer you a loan. To ensure that you score the best deal, youll want to shop around to find out what your options are.
When determining which lender to choose, make sure you review the Loan Estimate forms provided by each lender. The Consumer Financial Protection Bureau requires all lenders to provide you with this standard three-page form to ensure that you understand the differences between what lenders are willing to offer you. Loan Estimates will give you a rundown of the terms of your home equity loan, including the interest rate, and itemize the closing costs and fees youll be charged.
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Is A Home Equity Loan Considered A Second Mortgage
Yes. Its considered a second mortgage when your home is used as collateral for the loan, just like the first mortgage.
Thats what helps make a home equity loan cheaper than other types of loans. Its a secured loan thats secured by your home. Worst case, if you dont make payments on the second loan, the lender can foreclose on the loan and repossess your house.
The first loan from your original lender, however, takes legal precedence so any proceeds from selling the home would first go to pay off the first loan before the second loan is paid. If anything is left, you would receive it.
With up to 30 years to repay, a home equity loan can be equal to or even longer than your first mortgage. If you dont borrow too much, it may take a lot less time to pay it off than the first mortgage.
This is one reason why its important to make sure you can afford both mortgages. Find out how much the monthly payment and other possible costs are of a second mortgage and make sure it fits in your budget. Having a new kitchen or living room remodeled is great, but wont be so enjoyable if you cant afford the loans.
Know Your Options: Heloc Home Equity Loan Or Cash
While a cash-out refinance makes the most sense in terms of current rates, its not the only option. Home equity loans and home equity lines of credit are common ways homeowners can tap into their home equity for things like home improvement, debt consolidation, or even paying for a childs college tuition.
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Average Heloc Interest Rates
Home equity line of credit borrowers have the benefit of drawing on their funds as needed, rather than receiving a one-time lump sum. HELOC interest rates are more volatile than home equity loans due to their variable rate structure. However, many HELOCs feature lower rates, at least when you first open the credit line. The variable interest rate will adjust with the market over time.
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Rates assume a loan amount of $25,000 and a loan-to-value ratio of 80%.
On a national level, HELOC rates range from 4.28% to 6.95%. The majority of HELOC rates are tied to the prime rate, which means the market will determine how much a borrower incurs in interest costs over time. While this means that your interest rate might fall, your interest costs could also skyrocket if you’re in a rising interest rate environment.
If you like the flexibility that a HELOC offers but you’re worried about rising rates, some lenders offer fixed-rate HELOCs that allow you to lock in a certain interest rate on your borrowing costs in exchange for a fee.
An Option For Those In Good Financial Standing
If youve built up equity in your home, have a strong credit score and a low debt-to-income ratio, a home equity loan may be beneficial for you. It will enable you to take out a large, lump sum that you can pay off over an extended period.
Since home equity loans come with fixed interest rates, your monthly payments will never change, and youll know exactly how much you need to budget to repay the loan.
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Home Equity Loan Vs Heloc
Home equity loans and home equity lines of credit are both loans backed by the equity in your home. However, while a home equity loan has a fixed interest rate and disburses funds in a lump sum, a HELOC lets you make draws with variable interest rates, like a credit card.
Generally speaking, if you’re planning on making multiple home improvement projects over an extended period of time, a HELOC may be the better option for you. If you’re thinking about consolidating high-interest credit card debt or doing a larger home improvement project that would require all of the funds up front, a home equity loan may be the best option.
What Is The Difference Between A Home Equity Loan And A Cash
Home equity loans and cash-out mortgage refinances are both potential ways to get money for home renovations or unexpected expenses. That said, both options have their pros and cons.
While a home equity loan is a “second mortgage” that allows you to borrow additional funds for nearly any purpose, a cash-out refinance replaces your existing mortgage. With a cash-out refinance, you’ll take out a new mortgage for more than your outstanding loan balance, and then withdraw the difference in cash. Because of this, a home equity loan is typically best if you already have a good rate and terms on your current mortgage. A cash-out refinance only makes sense if you can qualify for a better interest rate on your mortgage and you don’t mind resetting your repayment term.
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Get Money From Your Home Equity Line Of Credit
Your lender may give you a card to access the money in your home equity line of credit. You can use this access card to make purchases, get cash from ATMs and do online banking. You may also be given cheques.
These access cards don’t work like a credit card. Interest is calculated daily on your home equity line of credit withdrawals and purchases.
Your lender may issue you a credit card as a sub-account of your home equity line of credit combined with a mortgage. These credit cards may have a higher interest rate than your home equity line of credit but a lower interest rate than most credit cards.
Ask your lender for more details about how you can access your home equity line of credit.
Second Mortgage Terms And Conditions
The biggest risk associated with applying for a second mortgage is the possibility of foreclosure. Second mortgage terms dictate that you will not only have to pay the payments of your first mortgage, but will also have to keep on-top of the payments for your second mortgage as well. And because second mortgage rates in Canada are higher than those for first mortgages, your overall monthly payments will increase. If you run into trouble paying back the first or second mortgage, your home is at risk of being foreclosed.
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Who Can Benefit From A Second Mortgage
Second mortgages are often recommended as a short-term financing solution. The high interest rates along with the large penalties and fees can discourage individuals from taking a second mortgage. In addition, an applicant must have sufficient equity in their home in order to support a second mortgage.
Since income and credit history both play an integral part in the qualification process of a second mortgage, many Canadians 55 plus or Canadians who are approaching retirement may not qualify.
What Is The Difference Between A Home Equity Loan And A Home Equity Line Of Credit
Home equity lines of credit, called HELOCs for short, also allow homeowners to borrow against the equity they have in their home, just like home equity loans do. The loan amount for each depends on your equity and homes market value.
A loan and a line of credit, however, are different in a few ways.
An equity loan is an amount of money paid in a lump sum. The upfront amount of money is usually set at a fixed interest rate based on how much you borrow.
The loan term is set for a certain amount of time at a fixed interest rate, much like your first mortgage. An equity loan is sometimes called a second mortgage and is subordinate to your first mortgage.
An equity line is a line of credit that you can draw on as you need it. The draw period is for a set amount of time, and youll have ongoing access to the cash as needed. For example, this can come in handy if a home remodeling project goes over budget and you need more money to pay a contractor.
The payment made on a home equity line is based on the amount of money you transferred. HELOCs usually have a variable interest rate, which can make them more expensive than the fixed interest rate of an equity loan.
But a HELOC loan can be advantageous, too. It provides flexibility by allowing you to borrow what you need, and then pay it off and borrow again. Paying off the amount you use can result in a lower monthly payment instead of borrowing a lump sum.
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Transfer Your Home Equity Line Of Credit
When your mortgage comes up for renewal, you may consider transferring your mortgage and home equity line of credit. Youll likely have to pay legal, administrative, discharge and registration costs as part of the switch.
You may also be required to pay off all other forms of credit, such as credit cards, that may be included within a home equity line of credit combined with a mortgage.
You may be able to negotiate with a lender to cover some costs to transfer any credit products you may have. This can be difficult if you have different sub-accounts within your home equity line of credit combined with a mortgage that have different maturity dates.
Ask your lender what transfer fees apply.
How Home Equity Loans Helocs And Cash
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Youll typically need an after-transaction loan-to-value ratio of 90% or less to qualify for any of them.
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You can use the money as you see fit, though its generally recommended that homeowners only borrow against home equity for value-adding home improvements or debt consolidation.
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Your home is the collateral, so failure to make payments could lead to foreclosure.
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Is A Second Home Mortgage Right For You
A loan to purchase a home is usually the first mortgage lien recorded on a property subsequent loans depend on the amount of owners equity in the home and generally require a new appraisal. Homeowners may use the money from these second mortgages available as a lump sum home equity loan or as a home equity line of credit for any purpose. Deciding which loan is right for you depends on the loan’s purpose and your personal spending habits.
Who Should Consider A Home Equity Loan
If you need a lump sum of money for something important and are sure you can easily repay a home equity loan or second mortgage, its worth considering. The rates on a home equity loan tend to be significantly lower than rates on credit cards, so a second mortgage can be a more economical option than paying for what you need with plastic. And sometimes the interest paid on home equity loans or second mortgages is tax deductible, so this may be an added financial bonus .
Just remember, you will get all this money in one lump sum, and you can lose your home if you dont repay the loan. So make sure that a second mortgage makes financial sense for you, rather than an option such as a home equity line of credit, where you can take out the money little by little.
Current Refinance Rates
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What Are The Benefits Of A Heloc
Because they are secured lines of credit, HELOCs come with significantly lower rates than credit cards or personal loans. A HELOC is a revolving line of credit and generally works very similar to a credit card, but is much cheaper to use. Another benefit of a HELOC, as opposed to accessing home equity through refinancing, is that you don’t need to withdraw all of the funds at once. That means you’ll only pay interest when you actually use the funds.
