• to make improvements that increase the value of your home; or
• to pay off higher interest rate debt you have accumulated, usually from credit cards, and consolidate it to make one payment at a lower interest rate.

As with most things in life, there are pros and cons to obtaining a home equity loan to consolidate debt.

The positives include the convenience of making one bill payment instead of multiple payments; securing a lower interest rate which equates to savings in the long run, and the ability to claim a tax deduction for the interest paid on your home equity loan which is not permitted for credit card interest. These potential benefits will be offset should you use your newly available credit card limits to charge up new debt, which could put you at risk for not being able to meet your payment obligations on your home equity loan.

There are other considerations to think about before applying for a home equity loan to be confident it’s a good financial decision. These include whether or not your lender will require you to pay for Private Mortgage Insurance (PMI) with the addition of this loan, which will decrease your total savings. Additionally, the repayment term you select for your home equity loan versus what interest you would pay at a shorter pay-off term for your existing credit card balances needs to be considered. For example, paying off a 15-year home equity loan at 7.25 percent interest may not result in real savings versus paying monthly credit card payments at 11 percent interest for five years.

Home Equity Line of Credit (HELOC)

As an alternative to a home equity loan, most lenders offer the opportunity to apply for a home equity line of credit (HELOC). Both types of financing allow you to get cash out of the equity you have built up in your home. A home equity loan is a fixed amount that you borrow and make payments on for a set period of time, generally any length from three to fifteen years. A home equity line of credit is like a bank account where you can write checks based on the equity available in your home. There is no set repayment period and you can continually borrow against it (up to the approved limit set by the lending institution), much like with a credit card, with the added advantage of being able to deduct your home equity line of credit interest on your tax return. You can pay off your home equity line of credit and continue to borrow against the line without having to take out another loan.

LendingLeaders will match you with lenders who will work with you to help decide what mortgage options are right for your situation. To have one of our lenders contact you, simply fill out the quick 1 Step Mortgage Home Loan Request Form.

Some lenders permit or may require borrowers to pay for additional costs above and beyond the principal and interest on the mortgage loan and usually includes real estate taxes and property hazard insurance. The estimated yearly cost for taxes and insurance is divided into monthly amounts and added to the cost of principal and interest on your mortgage loan. The amount collected monthly for taxes and insurance is placed into an account called an escrow account and is paid once a year when due. When escrow is used, a monthly payment is often referred to as a PITI payment (Principal, Interest, Taxes, Insurance).

Some lenders may require an additional payment for private mortgage insurance. Whether or not your mortgagor will require you to pay for PMI will depend on the type of mortgage you have and how much vested interest, equity, you have in your home.

How to Qualify for a Loan

When considering your application, mortgage lenders are primarily concerned with your ability to repay your mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you will have for a down payment (most lenders will require anywhere from 5 percent to 20 percent of the purchase price of the home). A mortgagor will calculate your debt to income ratio when considering your mortgage application. There are two ways to do this. Generally, your monthly mortgage payment (including principal, interest, taxes and insurance) should not exceed 28 percent of your gross monthly income. Additionally, all of your debt (including car loans, mortgage payment, child support or alimony, credit cards, student loans, etc.) should not exceed 36 percent of your gross income.

Types of Mortgages

Lenders offer several types of mortgages, but the most common are fixed-rate mortgages. These loans feature fixed rates and set monthly payments, generally for 15-year and 30-year periods. They’re popular because managing a monthly budget is easier with set payments and they are affordable when interest rates are low. However, if you are planning on owning your home for a short period of time (less than five years) or if interest rates are high when purchasing your home or refinancing and you think they will fall, then an adjustable rate mortgage (ARM) might suit your needs. Adjustable rate mortgages differ from fixed rate mortgages because after an initial fixed rate period, the interest rate on an ARM will fluctuate as the market interest rates change. Adjustable rates start lower than fixed rate mortgages but there is the risk of higher rates over the years. Adjustable rate mortgages are available with different initial fixed-rate periods that range from one year, three years, five years, seven years and even up to ten years before the rates will adjust. Borrowers do have some protection from extreme interest rate increases because adjustable rate mortgages come with caps that limit the amount by which the interest rate can change.

Additional Mortgage Types

Other, less-often used mortgages include: Jumbo mortgages, which exceed the loan limits set by Fannie Mae and Freddie Mac; Two-Step mortgages, which combine elements of both fixed and adjustable rate mortgages; Biweekly mortgages, which are fixed rate mortgages in which payments are made every other week instead of monthly; Balloon mortgages, which give borrowers lower rates and payments for a specific period of time with a large lump sum principal balance payment due at the end of the balloon period; Assumable mortgages, which permit homeowners to “hand-off” the loan to a buyer instead of paying it off at the time of sale; Subprime mortgages, which are generally approved for home buyers or owners with less than perfect credit; and Construction mortgages, which are issued to people to build their home instead of purchase an existing home.

LendingLeaders will match you with lenders who will work with you to help decide what mortgage options are right for your situation. To have one of our lenders contact you, simply fill out the 1 Step Mortgage Home Loan Request Form.