Debt is an issue anyone who lives in the modern world has to deal with. Many people are able to balance their debt just fine, but sometimes, for reasons out of your control, it can get beyond your ability to handle it. That’s when you look for solutions.
One solution you might wonder about is a home equity loan and if that is a good way to pay off your debts. In this blog, we’ll look at whether or not that’s a good idea.
What is a Home Equity Loan?
Home equity is essentially the portion of your home that you own, determined by the value of your home vs how much you owe on your mortgage, your home equity line of credit, and any other lines of credit secured by your home.
For example, if your home is valued at $400,000 and your remaining mortgage balance is $300,000, that means you have $100,000 in home equity.
A home equity loan is money that you borrow against the equity of your home. It may also be called an equity release. A home equity loan will usually allow you to borrow up to 80% of your home’s value.
Should You Take Out a Home Equity Loan to Pay Off Your Debt?
As with many things debt-related, the answer is “it depends”.
A home equity loan can basically be used as a debt consolidation loan, allowing you to pay off multiple existing debts into a single loan using your home equity as collateral. What’s the point in simply trading one debt for another? Well, when done right, a home equity loan will have a much lower interest than your other debt obligations, letting you pay off your debts faster.
If you’re struggling with higher-interest debts, a home equity loan can be a great solution for you.
Advantages
Get lower interest rates – you’ll save money on interest, as the interest rates for home equity loans are often much lower than other types of loans.
It’s flexible – home equity loans are usually fairly flexible and can easily be customized to suit your needs.
They are easier to manage – if you have lots of little debts, you might have a hard time remembering the details of all of them. A single home equity loan is much easier to keep track of.
Disadvantages
Requires a considerable amount of equity – you need to have enough equity to cover all your other high-interest debts. If you haven’t had a chance to build much equity yet, it may not be an option.
They can be high risk – in a home equity loan, you’re putting up your home as collateral. If you default on your loan payments, your house may be seized.
It requires a mortgage stress test – if your loan is held by a bank or other federally regulated agency, you will need to pass a stress test.
Speak with Eastern Ontario's D. & A. MacLeod Company Ltd. for Debt Solutions
Being stuck with debt can be stressful. That’s where D. & A. MacLeod Company comes in. We are licensed insolvency trustees in Ottawa that can help you get back on your feet and pay off your debts. Whether you want to secure a home equity loan or find another solution, you can count on us to help. Contact us today for a consultation!
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