Should You Tap Your Home’s Equity To Manage Personal Debt?

Should You Tap Your Home’s Equity To Manage Personal Debt?


Money Bag

Your personal debt level can be having an adverse impact on the way that you live. Credit cards, student loans, auto loans and department store debt can quickly add up — factor in interest rates of 10, 12, even 20 percent or more and the burden on consumers can be tremendous. If you are a homeowner, a readily available way to handle your debt load can ease the burden for you. Yes, tapping the equity in your home is one way for you to consolidate debt.

Residential Debt Consolidation

The longer you live in your residence, the more likely you have built up a decent amount of equity in your home. As you pay down your mortgage and enjoy the rising value of your home, the difference between your mortgage’s pay off amount and its current value is what lenders consider to be the equity in your home.

Let me give to you an example: You bought your home just over four years ago for $185,000, taking out a mortgage loan for $165,000. At that point your equity (or piece of the pie) is $20,000. Between making fifty payments to the mortgage company and kicking in an additional $50 whenever you had it, your outstanding balance has been reduced to $152,000. What’s more, your home’s value has increased nicely, thanks to a robust housing market.

An appraisal of your house reveals that it is now worth $219,000. The difference between $219,000 and the $152,000 outstanding balance on the mortgage loan is now $67,000. That latter amount represents your home equity, a portion of the amount you can use for debt consolidation.

Home Equity Lending

Lenders will look at your home’s value ($219,000) and allow you to borrow as much as 80% of that amount ($175,200) minus the amount you owe on your mortgage ($152,000). Therefore, you could borrow as much as $23,200 ($175,000 – $152,000) to cover debt, living expenses, and even take a vacation. Of course if your debt level is much smaller than that, you may simply want to borrow enough money to pay off your debt and then allow 5-10 years to pay off your low, fixed-rate home equity loan.

Home Equity Loans — Tax Advantages

Most homeowners are able to take advantage of tax deductions for their home mortgage. However, those deductions do not extend to cover most personal debt. On the other hand, a home equity loan is usually tax deductible even if the monies were used to pay off personal debt. In other words, you can let the government reward you for paying off high interest rate credit cards and other loans by giving you an extra deduction come tax time.

Worth Your Consideration

Of course, whether it is personal debt or a home equity loan, you will have to pay off what you owe. A financial calculator can help you compare your outstanding debt with a home equity loan to help you develop a plan that is affordable, tax deductible, and much lest burdensome then the high interest rate personal debt you are presently battling.


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About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".