You have been overspending without realizing it and soon run into a cycle of debts. You know you have to do something about it and get out of this mess. Upon advice from friends and research online, you decided to use your home equity to consolidate your debts.

Before you sign on the dotted line to consolidate your debt, consider your repayment period carefully first. Because your loan overall interest payment is determined both by the interest rate and repayment period. Although you enjoy a lower interest rate on your equity loan, you still might be paying more interest because of longer repayment period.

Take for example: You have credit card debts of $10,000 and need to take up a $10,000 home equity loan.

For simplicity, we’ll use 10% loan interest rate.

For a 5 years loan, you will need to pay $212.47 monthly and incurred a total interest payment of $2748.20 when you finish servicing the loan.

For a 10 years loan, you will need to pay 132.15 monthly and incurred a total interest payment of $5858 when you finish servicing the loan.

From the above calculations (are estimates and are not guaranteed for any particular home equity loan), you can see that you will need to pay a much higher interest payment if you take a longer time to service your loan.

A little bit of interest every month can take up to a lot over a long period of time. If you are wise enough, draw out your monthly budget. See how much you can afford to pay back the loan every month.

The formula for saving your money on interest is simple, the shorter the repayment period, the lesser the total interest you incurred. But do take note of the late payment fees, know your limitations, and set a comfortable monthly sum where you know you can meet every month.

Moses Wright is the webmaster of Bulletpedia.com. He provides more helpful information on debt and bill consolidation tips, personal finance credit help and personal finance loan help that you can research in the comfort of your home on his website.

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Home equity loans allow people with bad credit to access relatively cheap credit. By tapping into your home’s equity, you can afford to do home repairs or pay for college. Home equity loans can also help you get out of debt sooner by consolidating your bills. And in some cases, interest from your home equity loan is tax deductible.

Cheaper Type Of Credit

With the equity of your house as security, a home equity loan provides you with one of the cheapest types of loans. With poor credit, credit cards rates can be 20% or higher. Unsecured personal loan rates can be just as much. But sub prime home equity rates are 1% to 8% higher than conventional rates.

Many people decide to use their equity to pay for large expenses, such as home repairs or college bills. You can also pick a home equity line of credit, which allows you to borrow against your equity much like a credit card account.

Consolidate Other Bills For Lower Rates And Payments

A home equity loan can help you get out of debt sooner by consolidating your bills into one payment with a low rate. Trading in your high interest credit card bills for a low interest home equity loan can save you hundreds a month.

When you select your second mortgage terms, you can negotiate loan terms. You can target your loan’s length to the payment amount. This means that for the same monthly payment you have with your bills now, your loan could be out of debt in less than five years. Of course, you can choose a longer period for smaller monthly payments.

Interest Can Be Tax Deductible

In some cases, home equity loan interest can be itemized on your taxes. If the principal was used to make home repairs, then the interest qualifies. But check with the IRS before including it on your taxes.

Under the right circumstances, a home equity loan can be a valuable tool. However, make sure you do your research on lenders before signing any loan contract. A few hours spent researching rates and fees can save you a real bundle.

View our recommended
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