How to Get Out of Debt - Home Equity Loans
If you are struggling to get out of debt but own your own home, you may have a distinct advantage over individuals who are currently renting. This is especially true if you have owned your home for some time and have substantial equity in it. In order to get the funds necessary to pay off other loans or high interest credit cards, you may want to consider a home equity line of credit. Before making this decision, however, you should understand that there are a few advantages as well as disadvantages to taking this particular route to debt freedom.
One of the biggest advantages to a home equity line of credit to pay off other debts is the fact that you will be more than likely trading and interest rate that is as high as 18% for something that is more in the 6 to 7% range. This can result in substantial savings over the long run. In fact, the interest rate being charged by your credit cards may be the biggest factor when it comes to getting out of debt. Missing payments or making payments late can add more fees to this but a line of credit may be able to help you pay them all off at once.
Another benefit to using a home equity loan to get out of debt is the fact that the interest charged on this loan is generally tax deductible. For example, you may be able to see an actual rate of 4.5% on your interest rate with a 25% marginal tax bracket. Put simply, you are not likely to find an interest rate this low anywhere else unless you borrow from a family member. This may be all the difference you need to finally get a leg up on your debt.
The biggest disadvantage to using your home equity to pay off your debt is in how you handle things. If you fall into the common trap of paying off your existing debt only to use your credit cards and build your debt back up again, you will have essentially doubled the financial hole that you were just in. The best bet is to pay off your existing loans and credit cards and keep them paid off until you have repaid the home equity loan that you took out. This means that is necessary to use caution in order to get the best results when using this method.