Panic is not an unusual response when you see your job security disappear practically overnight as your debts mount at breakneck speed. Using your credit cards to pay for essentials is a stopgap measure at best. It’s also a very expensive option when you consider the money you’ll pay in interest in case you don’t manage your finances adequately.  If you’re a homeowner who owes less on the house than it’s worth, you might consider using your equity to pay down your debt. Before you do that, however, you need to clearly understand what it means to use a home equity loan to pay off debt, how these loans work, what’s at risk, and whether or not it makes sense for your unique situation.

What is a Home Equity Loan?

A home equity loan is a second mortgage. It is a secured loan using your house as the collateral. The two most popular types of home equity loans are the traditional loans and lines of credit or HELOCs.

Use home equity loan to pay off your debt

The main differences between traditional home equity loan and HELOC are the way you access your money and the way you pay it back. With the traditional loan, you receive an agreed-upon lump sum that you begin paying back monthly, with interest, right away.

If you opt for a HELOC, a fixed amount of money is made available to you, and you draw on it as you need it, like a credit card. For a fixed period of time, typically 10 years, you can draw the money as you like, making interest-only payments. You only pay interest on the money you draw, not the entire amount.

After the draw period expires, one of two things will happen.

  1. You will be required to make what is known as a balloon payment, meaning you have to come up with the cash to pay off the loan in its entirety.
  2. You will have to begin paying back the money owed monthly for a period of up to 20 years.

Whether you have to pay off the HELOC immediately or repay it over time depends on how the loan was structured at the outset.

Advantages of Traditional Home Equity Loans

  • Home equity loans are one of the most affordable ways to consolidate debt and pay off large expenses.
  • Even though interest rates on second mortgages are higher than those on most first mortgages, they are still lower than the interest rates a lot of credit companies charge.
  • If you pay off your high-interest rate credit cards, you save money every month even though you’ll have the added home equity loan repayment.
  • Most home equity loans have fixed rates of interest. That means your payments will not change throughout the life of the loan making it easier to budget and plan.
  • You may be able to deduct the interest from your loan on your taxes, but only if you use the money for renovating or making major improvements to your home. Interest on credit cards is not tax-deductible.
  • You can borrow more money with a secured loan than with an unsecured loan.

Disadvantages of Traditional Home Equity Loans

  • You are incurring debt, it will take five to 30 years to pay off.
  • You are using your house as collateral. If you default on the loan, the lender can begin foreclosure proceedings.
  • If the housing market takes a downturn, you could end up owing more on your home than it’s worth.
  • If you default on the loan, it will be reflected on your credit report for up to seven years.
  • Chapter 7 bankruptcy doesn’t get rid of home equity loans.
  • If you have poor spending habits, taking out a home equity loan to pay off debt won’t correct them.

Is taking out a home equity loan to pay off debt right for your situation?

After you’ve considered all the pros and cons of a home equity loan, but before you talk to a lender, you should sit down and make sure it makes financial sense to take on such a big commitment. If the added debt of a home equity loan doesn’t substantially decrease your monthly obligations after you’ve paid off high-interest rate credit cards, car payments, or medical bills, it makes no sense to incur the additional debt.

If the cash you get from a home equity loan keeps you from going bankrupt and protects your credit rating until you can get back on your feet, are employed full-time again, or can afford health insurance, the added debt may well be worth it.

What to do if you don’t qualify?

If you’ve pinned all your hopes on getting a home equity loan to pay off debt and are denied because your credit score is too low, your debt-to-income ratio is too high, you have delinquent property taxes, or are currently unemployed, you don’t have to panic.

Skydan Equity Partners can help when banks and other mortgage lenders have turned you down.

We have a home equity loan alternative. Our sale and leaseback program can give you the cash you need to pay off your debts and get you through the current financial crisis.

You won’t be disqualified because of a poor credit score, an over-the-limit debt-to-income ratio, tax liens, or job loss. All we need to know is how much equity you have in your home. Skydan is the hassle-free alternative to home refinancing in Chicago. Since 2004, we have been helping homeowners solve their financial problems.

With Skydan Equity Partners:

  • You do not have a monthly mortgage payment.
  • You do not accrue interest.
  • You do avoid foreclosure.
  • You do get to stay in your home.

We will buy your house and rent it back to you (all rent payments deferred) for up to two years. After that, you get to decide whether you want to keep the house or sell it. If you want to keep it, we’ll sell it back to you for what we paid for it – plus the deferred rent. If you decide to sell, you keep any profit over and above what you owe us.

Our program is available to homeowners anywhere in the Chicagoland area. Give us a call today. We can get you the cash you need when everyone else has turned you down.