Do you ever feel like the conveyor belt of bills sliding across your kitchen table is at top speed? The bills keep coming and the balances due seem to stay the same month after month. Despite every effort to pay down the bills, there is no end in sight — each payment is only covering interest. It is not uncommon to feel defeated, or like you will be stuck in the debt trap forever. You are not alone – studies show that credit card debt is rising in Tennessee, where the average person carries a balance of $6,217.
Did you know that as a homeowner, you actually have an additional option at your fingertips to help you consolidate your debt. Believe it or not, your home can become your biggest ally in tackling outstanding debts. Through a home equity line of credit (HELOC), you are able to consolidate all your debt into one payment, set a payoff date and find the light at the end of the debt tunnel.
The real question is, how does it work? According to a 2018 TD Bank survey, 57% of homeowners expressed a lack of confidence in their understanding of how to effectively use a HELOC, especially as it relates to debt consolidation.
HELOC at a Glance
A home equity line of credit (Click Here to read our Guide to Getting a HELOC in TN) is a type of loan that allows you to borrow against your home in order to pay off large expenses such as home repairs and improvement projects or consolidate your debt.
A HELOC is often described similarly to a credit card. You use the line of credit to make purchases and then pay for the purchases later down the road. However, where a credit card is unsecured debt, a HELOC is secured debt — your home becomes the valued asset and is directly affected by your ability to make the necessary payments on the HELOC.
When using a HELOC for debt consolidation, you use your line of credit to payoff any outstanding debts you have. You are then responsible for paying that back – with your home as the collateral.
Benefits of Using a HELOC for Debt Consolidation
When it comes to debt consolidation, a HELOC provides advantages that unsecured loans cannot offer. When you take out a HELOC, you gain access to a large amount of funds you can divert to lingering debts stemming from credit cards, student loans, personal loans, and more. Like a credit card, a HELOC allows you to borrow up to a certain limit. You can borrow any amount at any time up to that predetermined limit. The more you pay back on the loan, the more you are able to borrow on your line of credit in the future.
Here are a few other ways a HELOC helps you manage your debt.
Lower Interest Rates
According the National Credit Union Association, most banks were charging an average interest rate of 5.62% for HELOCs, while credit unions were slightly lower at 5.34% as of December 2018. With the average credit card interest rate topping out at 17.57% in February 2019, it’s likely you would come out ahead if you used funds from a HELOC to pay off thousands of dollars in credit card debt.
Freedom to Choose
With a HELOC, you aren’t locked into using the funds for a particular purpose. You can use your HELOC to consolidate debt, make home repairs or improvements, cover college tuition or medical expenses, start a business, or any other large expenses that may come up. After you take out funds, you pay a monthly fee, including interest, based on the amount drawn. This means you aren’t expected to pay interest on the full amount of the credit line.
So, for example, you could use your HELOC to cover the cost for a home renovation in June and then access the line of credit again in November to consolidate your debt. All of this, of course, is dependent on what your financial institution approves you for..
One Payment
To live means to have debt, right? From medical and credit card debt to personal and car loans, debt can easily be defined as a part of life. When you consolidate using a HELOC, you receive one bill instead of stacks. You track one payment date, instead of multiple, simplifying your debt management strategy for the duration of your HELOC. A HELOC combines your standard mortgage payment with your repayment to the line of credit. One payment, one interest rate, one due date.
There’s an End in Sight
A HELOC has defined draw and repayment periods, so you will know exactly how long you can borrow against the line of credit. More importantly, however, you will also have a set date when the repayment period is over and you will be officially debt-free. Using a HELOC for debt consolidation provides you with a plan and a schedule that, if not followed, can cost you your home. It is important to understand that using a HELOC for debt consolidation should not be entered into lightly given the asset on the line. But when utilized correctly, this option for debt consolidation can grant you immense peace of mind as you meet your financial goals.
As a Tennessee resident, there are a few different avenues you could explore to getting a HELOC. US Community Credit Union has put together a guide to help you make the most informed decision in regard to your HELOC choices. No matter what course you take, your ability to secure a HELOC will always depend on the amount of debt you have, the income you make, the equity you have in your home, and your approach to handling credit. For more information about preparing to apply for a HELOC, find your local US Community Credit Union branch and get your questions answered!