Should I Consolidate Debt With a Home Equity Loan?

Home equity loans are often considered a solution to paying off debt. Using a home equity loan to pay off debt may be a good idea, but it depends on the details of your situation and the type of debt you have. 

If you are unsure if using a home equity loan to consolidate your debt is a good idea for you, visit one of our branches today, or call our Contact Center at (501) 982-1000 to learn more about home equity loans and if they’re a good option for you. 

Applying for a home equity loan is fast and easy. At Arkansas Federal Credit Union, you can apply online today in minutes.

What is a Home Equity Loan?

A home equity loan is based on the current value of your home minus the amount you still owe on your mortgage. With this type of loan, your home is used as the collateral for the loan. 

How Can You Use Home Equity Loans For Debt Consolidation?

If you have credit card or other high-interest debt, you can consolidate your debt and pay it off using the funds you receive from a home equity loan. Home equity loans typically have lower interest rates, often lower than credit card rates. Credit card debt consolidation with a home equity loan may lower your interest rate while you pay off your debt. 

Using a home equity loan to consolidate your debt can help to improve your credit score. If you can make consistent payments for your home equity loan, it can help you build a positive payment history, improving your credit score. Paying off your credit card through a home equity loan can also reduce your credit utilization ratio, which is the amount of credit that you have in use. The less credit you use, the better your credit score will be.

Pros of a Home Equity Loan for Debt Consolidation

Using a home equity loan can be very beneficial if you are dealing with a lot of debt from many different sources.

Paying off debts to multiple different places can be difficult and time-consuming. With a home equity loan, you can streamline your payments into one place.

Using a home equity loan can help you save a lot of money over the life of the loan. Home equity loans tend to have lower interest rates than most other loans, which means that over the life of your loan, you can save by paying less interest overall.

If your monthly finances are tight, a home equity loan can be a great option to lower your monthly payments not only through a lower interest rate but also through a longer repayment period. In addition to lower rates, home equity loans typically have longer loan terms, meaning you’ll be paying off the loan longer, but your monthly payments will be lower. 

Plus, with a home equity loan, your rate is typically fixed, so your payments won’t change over the life of the loan. This makes it easy to adhere to your monthly budget—unlike credit cards or revolving credit, which typically come with a variable rate, so your payment can change from month to month. 

Things to Consider with a Home Equity Loan

A home equity loan can be a good option for debt consolidation, but there are a few things you should consider before you decide to apply for a home equity loan to consolidate your debt. 

One of the most important things to consider with a home equity loan is that your home will serve as the collateral, meaning that if you default on your home equity loan, your home could be foreclosed on. If you’re concerned that you might struggle to make your payments, a home equity loan might not be the best option for you to consolidate your debt. 

Depending on how long you’ve already been paying off your debt, consolidating into another loan, even one with lower interest, could leave you paying off more interest.

Be sure to account for any fees that may come with a home equity loan as they could impact how much you would save in the long run. 

Before getting a home equity loan, make sure that you’re disciplined enough to stop using your credit cards. Since getting debt off your credit cards opens them up so you can use them again. If you’re not disciplined, you could end up deeper in debt than before you took out the loan. 

Home Equity Loan Requirements

Because home equity loans are based on your home’s equity, owning a home typically is not enough to be eligible for a home equity loan. Some lenders will require homeowners to have a certain percentage of the home value in equity in order to qualify. This means you may not be eligible with some lenders until you’ve paid off a certain percentage of your mortgage.  

As with most loans, lenders usually require a credit score and proof of income to be eligible for a home equity loan. This helps assure the lender that you will be able to pay back your loan. 

Home equity loans also typically require an appraisal, which is different from most other loan requirements. Because the amount of your loan is based on the value of your home, an appraiser may need to come to your house to give an up-to-date assessment of your home’s current value before you can be given a home equity loan.  

Take Out a Home Equity Loan Today

Getting a home equity loan to consolidate debt may be a good option if you have a lot of high-interest debt you’re struggling to pay off. 

Arkansas Federal Credit Union offers a variety of loan options. You can apply and get approved quickly online with no application fee. 
If you are interested in a home equity loan with Arkansas Federal, you can apply online in just a few minutes, visit one of our branches today, or call our Contact Center at (501) 982-1000 to learn more.