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Debt Help for Owners: Ready to Consolidate that Debt?

Homeowner’s with high interest debt—such as credit card debt—should consider consolidating their high-interest credit card debt under a home equity line of credit, a home equity loan, or through cash-out mortgage refinancing. The benefit of each of these three alternatives to high-interest credit cards is that each of these home equity options generates debt with significantly reduced interest rates.

While the home equity market fluctuates in specific interest rates, home equity debt consolidation consistently offers homeowners with high-interest credit card debt an opportunity to pay off existing high-interest debt at lower interest rates. For example, in September of 2005, Federal Reserve Chairman Alan Greenspan allowed interest rates for home equity lines of credit to fall below 4%—while the average fixed-rate credit card at the time was charging consumers roughly 13.5% interest.

Home Equity Lines of Credit

If you understand how a credit card works, then you already understand the principles at play when a homeowner applies to consolidate his or her debt under a home equity line of credit. Essentially, this type of equity loan operates like a credit card. A homeowner agrees to take out a loan for a specified maximum amount of money—$30,000 for example—and may run up or pay off this debt at his or her discretion. Unlike a credit card, the homeowner is not likely to be paying 13.5% interest rates on the debt.

Home Equity Loan

Unlike the home equity line of credit, a home equity loan provides consumers with a one- time, lump sum of money. The same consumer who used his or her home as collateral to open a $30,000 home equity line of credit could also have chosen to apply for a home equity loan. In this case, the homeowner would be given $30,000 up-front and allowed to spend the money at his or her discretion. Payments on the loan would begin immediately. Smart homeowners use home equity loans and lines of credit to pay off their high-interest credit cards up-front, making sure to request a loan slightly larger than their current credit card debt in order to finance costly projects like house repairs or necessary remodeling.

Cash-Out Mortgage Refinancing

A third important home equity debt consolidation strategy for homeowners in high-interest credit card debt to consider is cash-out mortgage refinancing. In this type of debt consolidation, a homeowner works with his lender to renegotiate, or “refinance,” his or her mortgage. The homeowner makes sure to request an increase in their loan amount sufficient to pay off existing debt accrued through high-interest credit accounts. If the market is right, the homeowner may even successfully refinance his or her mortgage under a lower interest rate than the original mortgage.

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