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What is a Home Equity Loan and Can it Help with Debt Consolidation?

Posted by Carolina Trust Federal Credit Union on Feb 14, 2020 10:15:00 AM

When hard-working people find themselves swimming in high-interest debt, it’s time to look for a lifeline and pull yourself out. Leveraging your home equity to consolidate monthly payments that are crushing your financial health and quality of life can be a game-changing solution.

Everyday people who wisely invested in residential real estate are widely experiencing equity growth. That is to say that your home value may have exponentially increased during the recent robust economy. It’s also not uncommon for the same people who made the bold move to buy a home to be struggling with credit card fees, student loan debt, and car loans, among others.

Need to Get Out of Debt? Try Our Definitive Guide to Using Home Equity Loans for Debt Consolidation

Securing a reasonably low-interest home equity loan can put you on the path to financial independence.Here are a few essential things to know about home equity loans and their debt consolidation value.

What is Home Equity?

In simple terms, home equity is a homeowner’s real interest in a residential property. In other words, if you subtracted what you owe on your mortgage from the home’s market value, that number would roughly equal the home equity interest you enjoy.

Equity can be established in a number of ways, including the initial down payment you made to secure a home loan. Traditional 20-percent deposits usually reduce the outstanding loan debt. Making ongoing monthly installments on a mortgage also reduces the loan’s principal and generally improves your equity interest in the property.

External factors may also play a role in the amount of equity, in a positive or negative fashion. During the global financial crisis and ensuing recession, home property values plummeted. People with substantial home equity discovered that the market value of their house was now below the principal of their mortgage. This meant home equity was in the negative, or “underwater.” In recent years, the improving economy and booming job market have helped drive home values up. That’s been cause for celebration among homeowners who are experiencing increased home equity without investing additional money.

How to Calculate Home Equity

Figuring out your current home equity does not necessarily require the assistance of a finance expert or accountant.

Start with the appraised value of the property. If you had a routine appraisal conducted in the last year or know the fair market value, that figure should be a good point of reference. Now, gather together all of the debts owed against the home.These include everything, including the mortgage, any liens on the property, and peripheral borrowing, such as a home improvement loan, among others. Add up the outstanding debt and subtract it against the appraised market value.

It’s important to keep in mind this is likely to be a rough estimate. To get a precise home equity amount, it’s in your best interest to consult with a home equity loan professional.

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Topics: Home Equity and HELOC

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