Being a homeowner isn't always easy. You may have a lot of financial responsibilities. In addition to paying off the mortgage, you may have student loans, for example. Property taxes. Home insurance. Maintenance. Tracking it all can not only be a major hassle but also lead to a messy situation in which you don't even realize the high rates you may be paying on debts like consumer debt.
A HELOC, or Home Equity Line of Credit, can potentially help. It can not only ease the burden of the debt (by lowering your interest rates—more on that in a bit), but it can save you money in the long run and speed up your path to freedom from debt. Even more convenient, it could simplify your life to make the debt more manageable.
Ways to use a HELOC to consolidate debt
Debt consolidation is a simple process by which you pay off multiple debts while taking out a new, single loan. With the old debts paid off, you can then focus on the single payments of the remaining loan. If this loan has lower interest rates than the other debts you were paying off, it can be a no-brainer—you're saving money in the long term.
Although a HELOC isn't your only option for debt consolidation, borrowing against your home's equity—as you do with a HELOC—lets you tap into a previously untapped source of value. And in contrast to a cash-out refinance, a HELOC will not require you to change the underlying mortgage rate that you're paying.
In other words, a HELOC can be an effective way to borrow against your home equity while still holding on to a favorable mortgage rate, if you have one.
If you’re able to secure a HELOC in the amount of your existing debts, you could pay off those debts with the money from the HELOC, and then you've moved your debts to a (potentially) lower-rate, single loan.
A HELOC vs credit card case study
Let's do some math. Imagine having $25,000 to pay to a credit card company, borrowed at a rate of 19.45%. Obviously, interest rates that high can be devastating: charged annually, that is $4,862.50 per year in interest. That number is simply what you need to pay just to stay afloat, without touching the underlying debt itself. And if you fail to pay that amount in interest every year, the interest only accrues.
Similar logic applies even if you have multiple credit cards. If securing a HELOC to pay off seven credit cards that add up to $25,000, a single HELOC's lower interest rates could potentially yield the same benefits. In the end, you've made a key distinction that could put you on the path to getting out of debt sooner rather than later.
To understand what makes this kind of debt consolidation possible, you have to understand two types of debt:
Unsecured borrowing does not have collateral attached to the loan. For that reason, lenders typically charge higher interest rates to compensate for the additional risk they're taking on. An example of common unsecured borrowing is consumer debt through credit cards.
Secured borrowing, including a HELOC, puts collateral on the line. You don't have to hand over that collateral as long as you make the payments. In return, the lender knows that there is less risk on their end, which in turn gives them a reason to lower the interest rates on the loan in question.1
Understanding this difference will be key to knowing how to get the most out of a HELOC.
Things to watch for when you have a HELOC
Tapping into your home equity can be a major boon to anyone with a lot of debt burdening them. But HELOC is also debt and has to be managed accordingly.
That means there are some potential things to watch for when using a HELOC. Remember that the debt consolidation plan is yours—it's not the lender's job to check in and make sure you're doing a good job paying off the other debts, except for the HELOC. Let's look at some of the key factors and things to watch for when using a HELOC:
Develop a plan. If you're paying off old debts, then make sure that you use the HELOC to pay them off immediately. Don't let the money sit and tempt you to do other things than your original intent. That's one advantage of working with a lender like Figure—you can have your money quickly and immediately put it to use against your other debt.
Watch your house value. If the value of your home drops significantly, you might not think it affects you until you sell the home. But it can affect how much equity you're able to borrow against with a HELOC.
Know what the interest rates are doing. Because HELOCs often come with variable interest rates, you'll have to be dutiful in paying them off. However, there are options for fixed-rate HELOCs that you can also use if you don't want this to be a concern when you're borrowing.
The faster you pay, the less you pay. Because of how interest works, you will have less to pay if you pay more upfront. It sounds counter-intuitive, but avoiding the accrual of interest is what makes debt consolidation so important. Remember that same principle when you approach your strategy to paying off your HELOC.
Securing a HELOC can work quickly and easily when you borrow from the right lender. Like any loan, it requires some basic caveats that you'll want to be aware of before acquiring one. But when you do the math and consider your options, a HELOC could be a fantastic way to consolidate debt and get a head start on paying it off.
How a HELOC from Figure works
You can work with Figure to secure a HELOC with a 100% online application process. The application can only take a matter of minutes, and once approved, the funds move quickly. Using blockchain technology, Figure's lending platform doesn't require dealing with an excessive amount of financial intermediaries. The result is faster and easier loans that arrive much more quickly.
Turn your home equity into cash with a Figure HELOC today!
1 A HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay.