Not long ago, consumers turned to home equity loans and home equity lines of credit (HELOC) primarily to fund such projects as remodeling the kitchen or building a deck. Today, in addition to home improvements, people may borrow against their home equity for a variety of reasons, such as to:
- Pay medical bills
- Cover college tuition
- Finance a new car
- Start a business
Another popular use is to consolidate debt—it’s a great way to get rid of high-interest credit cards and possibly even get a tax deduction. The interest rate on a home equity loan or HELOC will be lower, potentially much lower, than what you’d typically pay on a credit card or personal loan. The lender can offer this lower rate because your house secures the loan.
The interest you pay may also be tax deductible, which further reduces the cost of borrowing. Consult your tax advisor to find out which deductions may be available to you.
How much can you borrow?
If the value of your home is $350,000 and your current mortgage balance is $250,000, the equity in your home would be $100,000.
At Mountain America Credit Union, you can typically borrow up to 90 percent of the value of your home, less than your current mortgage amount—this is known as loan-to-value. Therefore, in this situation, 90 percent of the home value of $350,000 is $315,000. Deduct the $250,000 still owed on the mortgage, and you could potentially borrow up to $65,000.
How much can you save?
On a total credit card debt of $25,301, you could:
Pay off through credit card company at 15.74% APR*:
- Five years of equal monthly payments at $611.78
- Total interest paid: $11,405.88
Consolidate the credit card balance into an HELOC and pay off at 4.25% APR**
- Five years of equal monthly payments at $468.82
- Total interest paid: $2,827.98
So, if you’re paying too much interest on credit cards and personal loans and you have equity in your home, consider applying for a home equity loan or line of credit—it could save you a lot of money over the next several years.
*Based on average APR on a new credit card offer of 15.74 percent, according to CreditCards.com Weekly Rate Report, May 2017.
**All loans subject to credit approval. Membership required—based on eligibility.