If your debt load seems insurmountable, using home equity to pay off debt may be something for you to consider. You can eliminate your high-interest, unsecured debt and get a handle on your finances.
1. Add up your total debt load as well as your monthly debt paymentsThis helps you understand just how much debt you actually have. Focus on the debt that is high-interest and not tax deductible. For example, credit cards and car loans usually have high interest rates, while student loans do not. Once you know how much total debt you have and what your monthly payments are on those debts, you can determine how much of your home equity is needed to consolidate this debt.
2. Get a home equity loanShop around for the best interest rate for a second mortgage using your home equity. Once you find the rate you want, get the home equity loan and use the cash to pay off your creditors. Now, instead of paying several credit cards and the car loan, you have one monthly payment that is at a much lower interest rate. The interest on it might be tax deductible, too. (Consult your tax adviser to find out.)
3. Curtail your spendingIf you do use your home equity for debt consolidation, you must be sure to control your spending afterward. If you continue using credit cards, you will find yourself falling further into debt. Instead, work out a budget you can live with, and get rid of all credit cards except one with good terms that you can use only for emergencies.
When you consolidate debt using cash from a home equity loan, it is important to remember that the new loan is secured by your home. If you fall on hard times and default on the loan, you can lose the collateral, which is your home. That is why it is extremely important to analyze your situation carefully before using your home equity for debt consolidation, and to make a commitment to be disciplined in your spending.