How to Consolidate Debt Using My Home
You may be able to get a loan using the equity in your home as collateral. The loans are called home equity loans or home equity lines of credit (HELOC), and can be used for debt consolidation. Either loan can be used to pay off a variety of debts, including credit card bills, the balance on an automobile loan and more. However, the Federal Trade Commission says using the equity in your home to consolidate debt is usually a bad idea. The agency points out that you could lose your home to foreclosure if you are unable to repay the loan.
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Instructions
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Consult a nonprofit credit counselor, if necessary, to understand the difference between a HELOC and a home equity loan. A HELOC is a revolving line of credit that works like a credit card. You make payments only if you use the account. A home equity loan is called a closed-end loan. You are allowed to borrow a lump-sum payment and then begin making monthly payments. Credit approval and standards are the same with each loan. Contact a credit counselor by seeking a referral from your bank or credit union.
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Get an estimate of the market value of your home by ordering an appraisal from a home appraiser. A real estate agent can recommend an appraiser in your area. Or get a rough idea of your home's value for free from an Internet real estate site such as Zillow or Trulia. Use the sites to compare your house against others that have recently sold in your neighborhood. Your lender will order an official appraisal after you formally apply for a loan. However, a preliminary market value will help you determine if you have enough equity in your home to even qualify for a loan.
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Review the equity in your home. Declining home values make it possible to owe more on a home than it is worth, making a home equity loan impossible. According to the Federal Reserve Board, lenders will loan you a percentage of your home's appraised value -- say 75 percent -- minus what you owe on the mortgage. Example: The appraised value of your home is $100,000, and you owe $40,000. That leaves $35,000 as a potential loan amount after subtracting the amount owed ($40,000) from 75 percent of the appraised value ($75,000).
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Make a list of the debts you would like to consolidate with the loan. Confirm that you have enough equity in your home to pay off the bills.
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Get a copy of your credit report and score. Order your credit report for free from Annual Credit Report (see resouces). The site was established to offer free reports under the terms of the Fair Credit Reporting Act. Once you receive the credit report, follow attached instructions to order your credit score separately for a fee. Lenders set their own standards for loan approval, but applicants with the highest scores -- 700 or better -- receive the best rates and terms, according to the HELOC Basics website. The site says you should have a score of at least 620, although you may still be approved with a lower score.
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Identify past-due accounts by reviewing your credit report. Make payments to bring all open accounts current. Also resolve any old debts by contacting the creditor or debt collector. Remove any inaccurate information from your credit report by writing a letter to the credit bureau. Send the letter to the address on your credit report. Bringing accounts current and removing mistakes from your credit report could improve your chances for approval.
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Apply for your home equity loan from a bank, credit union or other lending institution.
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References
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