|Monthly Payment :||$910.00||$48.31|
|Average Interest Rate :||12.93%||5.00%|
|Payoff Timeline :||0 Yrs 11 Mts||30 Yrs 0 Mts|
|Total Monthly Payments :||$9,567.93||$17,393.02|
|Total Deductible Interests :||$0.00||$8,393.02|
|Avg Annual Tax Savings :||$0.00||$72.74|
HELOC stands for Home Equity Line Of Credit. HELOC is an option you might want to consider if you have certain amount in your home equity and your debt payments are more than you can afford to make each month. In addition, it can help you lower your interest rate on those same debts. To get an idea of how HELOC can affect you and your debt, let's take a look at an example.
If you have $9,000.00 in debt from a variety of loans with different interest rates, it might take you 0 year(s) and 11 month(s) to pay it off if the average interest rate of these loans is 12.93% and you are paying $910.00 per month. With HELOC, you would have a 5.000% interest rate and your monthly payments would drop dramatically to $48.31, though it will take you 30 years to repay the debt.
By paying off your loans without HELOC, your $9,000.00 loan will cost you a total of $9,567.93 to repay. Through HELOC, it will total $17,393.02, though $8,393.02 of that is considered tax deductible interest. The interest payments made without HELOC are not tax deductible.
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Should I Use a HELOC to Lower My Debt Payments?
A Home Equity Line of Credit, or HELOC, is a loan made on the amount you have acquired in home equity. Though you are still paying off your home, you can borrow on the value of your home that you have already paid off. If you have been living in your home for only a few years, you may have very little equity or even no equity. However, if you have been living in your house for a decade or more, you could have tens of thousands of dollars available to borrow.
A HELOC can come in handy if you want to add on to your home, remodel, or pay off other debts, such as credit cards, car loans or medical bills. However, you should carefully consider your options before making this choice to take out an additional line of credit. Understanding the advantages and disadvantages can help you to make the choice.
Benefits of a HELOC for Consolidating Debts
There are many benefits to taking out a home-equity loan. Primarily, a HELOC can help you to lower your debt payments by lowering your interest rate. Around Nov. 26, 2013, the national average interest rate for a 30-year fixed loan was 4.34 percent, while the average credit card rate was 15.36 percent. Though lines of credit may have a variable interest rate or may have a shorter term (anywhere from 5 to 15 years), the rate is still likely to be significantly lower than that of your credit cards. Depending on the amount of your debt, you could save several thousand dollars in interest charges in the first year alone.
By lowering your interest rate, you may be able to pay off your debt more quickly. Making the minimum payment on your credit cards can take you years to pay off your debts. By consolidating your debt with a HELOC, you can make one monthly payment with a lower interest rate, allowing you to both pay less each month and to pay off your debt more quickly.
Another cost-savings benefit is that you can claim an additional tax deduction each year. The interest you pay on home loans can be deducted from your income taxes. You can lower your annual tax obligation and perhaps even increase the amount that you get back at the end of the year.
There are a few disadvantages of taking out a HELOC, mostly dependent on your own spending habits. For example, when you pay off your credit cards, you clear up a significant line of credit. No longer are your cards maxed out, and no longer do you have to be careful about using them. This may tempt you to spend more freely, which could lead to the accumulation of more credit card debt. Before you know it, you could max out your cards again, and then you would have the same credit cad debt you did before in addition to your monthly HELOC payment.
When you consolidate your debt, you also move them from unsecured to secured status. If you defaulted on your credit card payments, the only recourse your creditors had was to report it to the credit bureaus. If you default on your HELOC, your creditor can foreclose on your home.
Making the Decision
Ultimately, whether a HELOC is the best idea for you depends entirely on your current financial situation and how much debt you have. The above calculator can help you make the decision by comparing the expenses you will pay with a HELOC with those you will pay on your other debts. For example, the calculator takes into account interest rate and loan term, as well as the closing costs and your estimated tax savings. It then compares that to all of the debts you plan to consolidate, including the amount you owe on your auto loan, credit cards and other accounts, your monthly payment and your interest rates. The calculator provides an easy monthly payment comparison to help you determine how much money you can save.