by Donna Burt

Created on: September 21, 2008   Last Updated: October 21, 2008

When it comes time to pay the bills it is hard not to notice one of the payments has doubled from last month. Since it has never been late it is hard to understand why. Upon review, you notice the interest rate has increased. You discover after calling the creditor that this is in your agreement; however, since you have such a good payment history they are willing to drop your rate, although still higher than it was. As frustrating and unfair as it is, you check the balance and realize you don't have the funds to pay it off. You make the payment while feeling you are held hostage to your debt.

With the economy having changed over the past year, consumer debt has changed too. Most consumers continue to make payments on medium to high interest rate credit cards or auto loans. Without realizing it, the ability to pay these debts off with an interest rate that could be as much as two-thirds lower exists just by borrowing against the value of their home.

While 80% of all homeowners consider their equity as their primary savings, it remains untouched. One positive aspect of the mortgage issue involves lower interest rates. Generally speaking, the federal or prime rate is what equity or cash out loans are tied to. As you review the advertisements sent to you by your bank with offers to borrow against your equity, now is a great time to consider this option.

In explanation, a cash-out loan uses the equity in a home as collateral. The amount available depends on the loan product and lending guidelines. Most guidelines require 20% equity remain in the property. This means anything exceeding this, as determined by the value of the property, is available as a loan. This money is issued either in a lump-sum amount or a line of credit. Repayment of the loan is made monthly.

There are benefits to an equity line of credit that do not apply to a lump-sum withdrawal. The biggest advantage being the monthly payment is accrued only on the balance, meaning you only pay for what you use. While lump-sum equity gives you the money up front, the payment is also based on the total amount borrowed.

With any type of loan, good financial sense is required. While borrowing against your largest "savings account" can be scary, it can also provide a relief to paying multiple credit card and auto loans each month. The key to a successful transaction would be to utilize the transaction to pay off the debt without reusing it. The monthly savings allows greater freedom and the chance to become financially secure. What a great place to be.

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