Questions to Ask About Home Loans Before You Consolidate Debt

Home equity loans and home equity lines of credit (HELOCs) allow homeowners to borrow against the equity in their homes. These kinds of home loans may make debt payoff a more attainable goal. 

Debt consolidation could help you save money on interest, reduce your monthly payments, and simplify debt repayment. If you're considering a home loan for debt consolidation, you want to make sure you know what you're getting into. 

Here are some questions to ask about home loans before you consolidate debt.

What’s the Interest Rate? 

Before consolidating your debt with a home loan, verify the interest rate. As you explore debt relief loan options, it can be valuable to compare APRs across different loans and lenders.  

Review your outstanding debts and the interest rates for each loan or credit card to see if this solution will offer savings. A home equity loan could be ideal for high-interest debt, like credit card debt. Generally speaking, if you don’t qualify for an interest rate that’s significantly lower than what you currently pay, it might not be a good idea to consolidate your debt with a new loan.

Is the Interest Rate Fixed or Variable? 

Ask whether the loan has a fixed or variable interest rate. Typically, home equity loans have fixed interest rates. That means that your interest rate and monthly payment amount will remain the same. Predictable monthly payments can make budgeting easier. 

Compare your current monthly debt repayments to figure out whether a fixed-rate home equity loan could help you reduce your monthly payments. 

HELOCs usually have variable interest rates. That means the interest rate could change over time. Your loan's monthly payment could increase or decrease. However, some lenders offer fixed-rate HELOCs. 

What Fees Will You Pay? 

Before taking out a home equity loan for debt consolidation, review all the fees. If you understand the financial impact of taking out a new loan, you could have an easier time comparing loan options. 

Much like when you closed on your original mortgage, home equity loans and HELOCs also come with closing costs. These expenses add to your borrowing costs. Exact fees can vary, but typical closing costs range from 3% to 6% of the loan amount.  

Some typical closing costs to expect include:

• Loan origination fees

• Appraisal fees

• Credit report fees

• Legal fees

• Title insurance 

Other Considerations to Make 

Here are some other factors to consider before consolidating debt with a home loan. 

Which loan is right for you? 

Home equity loans and HELOCs differ in how they function:

• Home equity loan: You’ll receive a lump sum of money upfront and will make fixed monthly payments until the loan is paid off. 

• HELOC: This kind of home loan is a revolving line of credit. You’ll have a set credit limit that you can borrow against as needed, during the draw period (typically five to 10 years). Then you’ll enter the repayment period (typically 10 to 20 years) and you can’t borrow more. 

A home equity loan is often a good fit for consolidating high-interest debt because it provides a lump-sum payment and has fixed, predictable monthly payments. But if you need more flexibility in how you borrow funds, a HELOC may be a better choice. 

Do you have sufficient home equity?

You must have enough home equity to qualify for a home equity loan. 

Most lenders will only allow you to borrow up to 80% of your home's appraised value, including the amount you owe on your first mortgage if you still have one. 

Related: Here’s how to calculate how much equity you may be able to borrow.

Do you meet the application requirements? 

You'll also need to meet other loan eligibility criteria. Most lenders require applicants to have a credit score of 620 or above. Some lenders may require a credit score of at least 680. 

You'll also need to meet your lender's debt-to-income (DTI) ratio requirements. DTI is how much of your income goes to housing and debt payments each month. A lower DTI ratio is preferable because it shows you are likely to be able to cover your bills each month with the money you bring in, and have room for a new loan payment. 

Related: Here’s How to Calculate Your DTI

Do you fully understand the risks?

Home equity loans and HELOCs are secured loans guaranteed by your home. This means your lender can take your home and sell it if you fail to repay your loan. 

Choose the Right Debt Management Solution for You

Bravo for taking action to address your debt. Home loans are one option to explore if you want to consolidate your debt. First, take time to review the pros and cons of home equity loans for debt consolidation.

It's also wise to review other debt consolidation methods. Debt settlement is an alternative if you can’t afford to fully repay your debts and a new loan isn’t the right solution for you. You may be able to negotiate with your creditors to accept less than you owe but consider the debt satisfied. This could help you get rid of your debt faster than by making minimum payments.  

As you explore your options, don't be afraid to get professional help from companies like Freedom Debt Relief. Working with an experienced debt relief company can ease your stress. A debt expert can help you understand what debt solution might be right for you, and may be able to refer you to a lending partner.