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Using Home Equity to Consolidate Your Debts – Consider Your Repayment Period Carefully |
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Submitted by Cheryl Adams
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You have been overspending without realizing it and soon run into a cycle of debts. You know you have to do something about it and get out of this mess. Upon advice from friends and research online, you decided to use your home equity to consolidate your debts.
Before you sign on the dotted line to consolidate your debt, consider your repayment period carefully first. Because your loan overall interest payment is determined both by the interest rate and repayment period. Although you enjoy a lower interest rate on your equity loan, you still might be paying more interest because of longer repayment period.
Take for example: You have credit card debts of $10,000 and need to take up a $10,000 home equity loan.
For simplicity, we’ll use 10% loan interest rate.
For a 5 years loan, you will need to pay $212.47 monthly and incurred a total interest payment of $2748.20 when you finish servicing the loan.
For a 10 years loan, you will need to pay 132.15 monthly and incurred a total interest payment of $5858 when you finish servicing the loan.
From the above calculations (are estimates and are not guaranteed for any particular home equity loan), you can see that you will need to pay a much higher interest payment if you take a longer time to service your loan.
A little bit of interest every month can take up to a lot over a long period of time. If you are wise enough, draw out your monthly budget. See how much you can afford to pay back the loan every month.
The formula for saving your money on interest is simple, the shorter the repayment period, the lesser the total interest you incurred. But do take note of the late payment fees, know your limitations, and set a comfortable monthly sum where you know you can meet every month.
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