Using Home Equity for Debt Reduction

There is an effective way to consolidate all your outstanding high interest debts into one single debt with an attractive interest rate if you own a home with equity that has accumulated over the years. You can accomplish this by securing a home equity line of credit. Basically you are using the equity you have built up in your home to secure a bank loan which you can then use to pay off your other debt.

The home equity line of credit offers an extremely attractive situation in paying off your other debts. First, the interest rates on these loans are usually well below the rates charged by credit cards making an immediate savings on the interest charges. All your non secured (credit cards, car loan, student loan etc.) debt can be consolidated into a single payment with an interest rate charge in the single digits. In addition, the interest you pay on the home equity line of credit is, in most cases, deductible on your taxes effectively making the interest rate a couple of points less than what is written.

There is a reason that this option was not mentioned before you began your guerrilla debt reduction plan. A problem with this type of loan is that many in credit card debt use a home equity line of credit to wipe out their credit card debts, but then immediately turn around and begin putting debt back onto the credit cards. What ends up happening is that they get themselves in double trouble with new credit card debt as well as a home equity line of credit that must be paid off. Worse, this time their house is on the line since it has been pledged as collateral in securing the home equity line of credit. That means if you default on paying this debt, you will end up losing your house. Until you have begun your guerrilla debt reduction plan and have kept with it for a few months to make sure your committed to paying off the debt (and even after), you should approach this debt reduction tool with caution and carefully consider if is appropriate for your situation. Next we will look at a few other consolidation options…

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