Feeling consumed by an overwhelming amount of consumer debt? Are unsecured outstanding credit card loans making you feel like wading through financial quicksand? Consolidated loans offer you the opportunity to repackage your debt into a more affordable option, offering you the opportunity to put yourself in a better financial position. A debt consolidation calculator uses inputs to show you how this refinance option can help you save by locking in a lower rate through your monthly mortgage payment.
How Can I Use my Built-In Home Equity to Put Myself in a Better Position Financially?
If you are a homeowner with enough equity built into your home, you can take advantage of that equity by combining the money you owe into a debt consolidation mortgage. A debt consolidation mortgage is also known as a conventional mortgage, a home equity loan, or line of credit. To take advantage of a home equity loan, you will need to make sure that you have strong credit and evidence of financial responsibility that will speak to your ability to repay your new loan.
Home equity loans are an attractive option because they allow you to borrow additional funds from a new mortgage (also known as a second mortgage), usually at lower interest rates and larger loan amounts than personal loans or credit cards. They also offer longer repayment periods, which can put you in a better position financially by allowing you to organize lower monthly payments more comfortably over a prolonged period of time.
What Inputs Are Needed to Calculate Your Debt Consolidation Loan?
A consolidated debt calculator configures your debts based on two main categories: the culmination of your total consumer debts and the estimated total with your new debt consolidation loan. See below what information is needed to determine the amount under each category.
- Credit Card Debts. This type of debt falls under consumer debt. For this input, you will need to provide the current balance due on your credit card loans, the interest rate, and how much you pay off monthly.
- Installment Loans. Installment loans also fall under consumer debt. You will need to input the same for auto loans, student loans, and other outstanding installment loans as you did with your credit card loans.
- New Annual Interest Rate. This information is input as part of your new debt consolidation loan. Ideally, this rate will be lower than the rate you currently pay on your outstanding consumer debts.
- Term on Your Consolidated Debt Loan. This input can be provided in months. Throughout the term on your loan, a structured payment plan will be established to guarantee the loan is paid off on schedule. Payment schedules can occur in weekly, biweekly, semi-monthly, or monthly installments over a negotiated term.
- Upfront Loan Fees. These are costs related to your loan approval and evaluation that do not get rolled into your new loan, which can include: appraisal fees, credit reports, loan origination fees, etc.
- Savings Rate. You will also need to find out the savings rate on your loan. This input tells you the rate you would have received if you had put your closing costs into savings. For most people, your short-term savings rate will fall between 2% to 5% annually.
- Discount Points. Discount points, also known as mortgage points and sometimes referred to as just “points” on a loan can lower your monthly payments under your debt consolidation loan. They are paid directly to the lender at closing in exchange for a reduced interest rate. One point is calculated at 1 percent of your mortgage amount (or $1,000 for every $100,000).
- Income Tax Rate. You will combine your state and federal income tax rates to determine your income tax savings when you use a home equity loan to consolidate your debt.
- Closing Costs. Some closing costs may be deducted if they are included in your upfront costs. While it may be more financially beneficial for you to roll these costs into your new loan under one lump sum, that decision is unique to your financial situation. This can include but is not limited to: appraisal fees, title search fees, title insurance, and legal fees.
The more prepared you are with your research for these inputs, the more accurate your estimated monthly payments will be. Use a debt consolidation calculator as a starting point to determine if taking out a loan against your home equity is the right financial decision for you as an individual.
Which Type of Home Equity Loan Should I Choose?
Home equity loans primarily come in two options: a fixed-rate, lump-sum option and a home equity line of credit, or HELOC. Both of these loan options work to consolidate your debt by using your house as collateral to refinance into a lower interest rate. There is also the option of a cash-out refinance, where you can leverage cash against the built-in equity of your home.
- Fixed-Rate, Lump-Sum Loan Option. With a fixed-rate loan, you receive one lump-sum payment from your lender that is repaid over a period of time with a fixed, or set, interest rate. Terms on these loan types typically fall within a range of five to 15 years and must be paid back in full if the home is sold. Be aware of closing costs that are attached to fixed-rate loans. A fixed-rate loan is the best option for you if you are looking for a one-time or straightforward cash option, or if you already have a low-interest mortgage and do not wish to refinance your loan.
- HELOC. A HELOC loan acts as a revolving line of credit and comes with variable interest rates that fluctuate over time in accordance with the market. With a HELOC loan, you are able to borrow against their home equity line (usually for up to 10 years). Then, the repayment period is initiated, which is determined at a certain number of years after the draw period ends. This loan option is best suited for people who want the flexibility to pay as they go.
- Cash-Out Refinance. You may also have the option to receive cash directly from your home’s built-in equity with a cash-out refinance. This option allows you to refinance your current mortgage for more than what you currently owe, and then take the difference in cash. A cash-out loan is best for you if you are looking for one consolidated loan secured at a lower rate or different loan term. The main difference between a cash-out refinance and a home equity loan is that you are essentially getting a new first mortgage with it versus taking out a second mortgage, making it a less risky option. Your credit score and financial statements will be evaluated by your lender to determine your eligibility for a cash-out refinance.
Keep in mind that because you are using your home as collateral to secure your consumer debts, there is a certain amount of risk involved with a home equity loan. Before deciding to take out a home equity loan, make sure you are in a position to continuously make on-time repayments on the loan. Otherwise, you could become vulnerable to foreclosure and potentially lose your home.
For home equity-based loans, you may be able to take out or borrow against up to 80% of your home’s equity. Your lender will need to evaluate your credit score, financial records, and combined loan-to-value ratio (CLTV). The CLVT is calculated by dividing the combined value of the two loans by the appraised value of the home (which usually cannot exceed 80%). The next step is choosing which loan type best suits your financial needs.
How Can The Home Loan Expert Help?
A debt consolidation calculator is a great tool for homeowners to use when gauging an estimate on how much they can potentially save by locking down unsecured debt into a consolidated loan. However, talking to an Expert lender whose mission is to put you in the best financial position by getting you the best deal on a loan can help you make a more confident and informed decision.
Our team of friendly lending Experts, that come from the same communities we serve, are built upon a foundation of years of loan expertise. We owe our successful growth nationwide to our commitment to our customer-first approach and knowledgeable team.Call us today at (866) 221-1981 to discuss if you are in the position to qualify for a debt consolidation loan or if it makes sense for your financial situation. Our friendly lending Experts are also available to chat online during business hours to discuss how you can make your home’s built-in equity work for you.