Pay off your credit card debt early with a HELOC

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Pay off your credit card debt early with a HELOC (Home Equity Lines of Credit)
2 years ago
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Are you looking to remodel your kitchen? Or maybe you want to find a quick and easy way to use existing home equity to pay off your credit card bills? Whatever prudent reason you have for needing cash, home equity loans may be the option for you.

The difference between the value of your home, and what you currently owe, is your equity. If the real estate market is going down in value, then it is possible to have negative equity, where your home is worth less than your mortgage note. For example, if the appraised value of your home is $100,000 and your mortgage is $50,000, you have $50,000 worth of equity in your house.

Of course, the problem is that all that money is tied up in your house, so if you need cash, you will have get a HELOC, (sometimes known as a second mortgage) which is the acronym for home equity line of credit. While you shouldn?t go out and spend that money on extravagant vacations, a second mortgage can be used to your financial betterment.

Suppose you have $50,000 worth of credit cart debt at 20% interest, and receive a home equity line for $50,000 at 10% interest. Your credit cards would cost you 10,000$ annually, and your second mortgage would only cost $5,000 in interest charges a year, saving you $5,000 a year! You can apply this money to your existing balances and pay off your debt in a fraction of the time.

So how do you receive a HELOC? First you must keep in mind that your second mortgage is secured by a lien on your house, so if you decide not to pay off the loan you may be out of a place to live. Your local bank can aid in selecting a HELOC, but you should shop around, even if it is a different bank than where you acquired your first mortgage. As a general rule of thumb, your rate should not be more than two or three points above prime if you have good credit.

You will receive the best interest rate if your primary mortgage, plus the secondary mortgage, doesn?t exceed 80% of the value of your home. For example, if your home is valued at $100,000, and you have $50,000 left on your note, you should not borrow more than $30,000. This would put your new loan at $80,000, which is 80% of your home?s value, with $30,000 in your pocket as cash.

When choosing a home equity line of credit, be aware that mortgage interest, paid on your personal real estate, and consumer interest, which is paid on student loans and credit cards, differ in the respect that sometimes consumer interest cannot be written off on your state and federal income tax forms.

There are exceptions to these rules. If your HELOC does not exceed $100,000, the IRS allows you to write the interest off, but don?t try to write off amounts over $100,000 or Uncle Sam may come knocking on your door! The second exception involves borrowing in excess of the fair market value of your house. For example a 110% home equity line would not permit the extra 10% to be written off, as it is seen as cash.

Whatever the reason for obtaining a HELOC, it is advisable to not treat your home as an ATM. Used prudently, such a loan can aid in sending your children to college or paying off your credit card debt early. Don?t get trapped by treating a home equity line as spending money, as it is like any other loan and must be paid back eventually, with interest.

by Juliane Anders
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