If home is where you “hang your hat,” then it can also be a good starting place for consolidating debt. Many homeowners find themselves so swamped in monthly bills and collection notices that they fail to see the literal value of their homes. If you have any equity built up in your home, and need an effective method to consolidate other debt into one manageable monthly payment, using a home equity loan may be your best option.

How Home Equity Loans Work

If you bought your home for $100,000, and have paid $20,000 toward the principal, then you have earned $20,000 worth of equity. This is one of the key figures—besides an updated home appraisal—that lenders use to determine how much you can borrow. With a good credit score and $20,000 worth of equity in your home, you could (with some lenders) be eligible for a loan of $25,000.

Downside of Consolidating Loans Through Home Equity

Home equity loans are a great way to consolidate other loans, if you keep a couple of things in mind:

* Almost 80% of people who consolidate debt end up incurring the same amount of debt—again. If you borrow $25,000 to pay off credit cards—only to run them up again—you’ll be faced with mounting credit card payments and a new home equity loan to pay off.
* Home equity loans are secured debt. If you default on the loan, your lender can foreclose on your home.
* Lower interest rates aren’t a given. Has your credit score dropped because of missed or late payments? Read the fine print to make sure that your home equity loan offers interest rates that are competitive with your current ones.
* If you sell your house, you will have to repay the home equity loan in full—in addition to your current mortgage.
* Some lenders will encourage you to borrow more money than you need. Remember, this is not free money. It is a loan, and must be paid back.

Upside of Consolidating Loans Through Home Equity

Using home equity to relieve financial stress does have its advantages. However, there are even more benefits of using home equity loans to consolidate debt:

* Because home equity loans can be spread out over many years, your monthly payment can drop significantly.
* Home equity loans are tax deductible.
* Interest rates are usually lower than other types of loans, since your home is collateral.
* If you don’t rack up additional debt—a home equity loan is an easy and affordable way to pay off unwanted debt at a steady pace.

Anyone who has ever used a home equity loan to consolidate other debts and loans knows that home is not a physical shelter—it can be a financial one as well. Without a doubt, home equity loans are a great way to keep all your debt under one roof.