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Are you drowning in a sea of high interest debt? If you’re getting dunning notices from the debt collection agents and you’re going through an annoying phase in life, you must make sure you take certain solid steps so that you can get rid of the debt cycle and stay on top of your finances. Other than taking out a debt consolidation loan, debt elimination through debt settlement company, an unsecured loan and resorting to a balance transfer method, there is also another way to consolidate your debts, by taking out a home equity loan. Understanding how to use a home equity loan to repay your unsecured credit card debts can help you get back a grip on your personal finances. Read on to know how you can use your home equity in consolidating your credit card debts.

What actually is a home equity loan?

When you take out a home loan of a particular amount, you’re liable to repay the amount throughout a period of 15 or 30 years. As you start repaying the loan in monthly payments, you are taking small steps to owning your home. At any point of time, home equity is equal to the amount of remaining balance of your mortgage loan when subtracted from the total value of your home. For instance, if your home value is $200,000 and you still owe $100,000, then the home equity that you’ve accumulated in your home is about $100,000. While you’re still living in your house, you can easily take out a loan of that amount and use it to consolidate your unsecured debts.

How can a home equity loan help you in consolidating your credit card debts?

Well, we all know that credit cards carry outrageously high interest rates and the biggest reason for the large number of defaults on them is the sky-high rates. During such a situation, you can easily tap the equity in your home and use it in consolidating your debts. Have a look at the benefits that you may reap when you take out a home equity loan.

  • Extended repayment term: Secured loans carry longer repayment terms than unsecured loans and this is the most popular reason why most credit card debtors resort to a home equity loan in consolidating their high interest debts. You can repay the credit card debt throughout a longer period of time and thus the monthly payments will be more relaxed.
  • Lower interest rates: As you have pledged your home as collateral, the mortgage lending company will charge you low interest rates and they have fewer risk involved in lending you a loan. Since the interest rates are much lower than on the unsecured loans, you can repay the debts in easy and affordable monthly payments.
  • Tax breaks: There is a difference between good debt and bad debt and most surprisingly home equity loans are known as good debt. This is the reason why the debtor will enjoy some tax breaks when they pay the interest rates on the home equity loan. In short, the interest rates on the equity loan will be tax-deductible.

What are the options for accessing your home equity?

When you decide to take out a home equity loan, you can access the cash in two different ways in accordance with your financial condition and needs. Here are the two different options.

  • Home equity line of credit (HELOC): When you take out a HELOC, it is slightly different from a HEL or a home equity loan. The lender will provide you with the money that is within your credit limit and you can access this amount through a credit card or a debit card. The interest rate will be usually adjustable and you have to pay the interest on the amount that you withdraw.
  • Home equity loan (HEL): This is certainly a better option when it comes to debt elimination. You just have to take out a second mortgage tapping the equity in your home. You will get back the money as a lump sum amount.

Therefore, when you want to reduce your debts through debt elimination as you’re cash-strapped, you can check the amount of equity that you’ve accumulated in your home. If it is enough, you can certainly take out this loan and combine all your debts through this loan.