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Ramesh pays ₹25,000 every month towards his personal loan and credit card debts. His credit card carries an interest rate of 36% annually, while his personal loan has a rate of 18%.
He owns a house valued at ₹50 lakh, with ₹30 lakh still remaining on his home loan.
This means his home equity is ₹20 lakh.
By leveraging it for debt merging, Ramesh could consolidate his debts at a much lower rate, let’s say 9%. This could cut his monthly payment down to ₹15,000, saving him ₹10,000 every month!
In India, home loan interest rates vary across banks. As of September 2023, some banks offer home loan rates starting from 8.4% per annum.
Read More :- AU Bank Net Banking
Debt merging is a powerful tool. Let’s break down how to use home equity to clear high-interest debts and streamline payments.
What Is Home Equity and How Does It Work?
Home equity is the difference between your property’s market value and the balance on your mortgage. For example:
- Property value: ₹60 lakh
- Outstanding loan: ₹40 lakh
- Home equity: ₹20 lakh
Think of home equity as an untapped resource. When you repay your home loan or your property’s value rises, your equity increases. This becomes an asset you can use to consolidate debt at a lower rate.
Debt Consolidation: Why It Works for High-Interest Loans
Debt merging works because it replaces high-interest loans with one manageable payment. Here’s an example to make it clear:
| Type of Loan | Outstanding Amount (₹) | Interest Rate (%) | Monthly EMI (₹) |
| Credit Card Debt | 2,00,000 | 36 | 7,200 |
| Personal Loan | 5,00,000 | 18 | 12,200 |
| Total | 7,00,000 | – | 19,400 |
| Using Home Equity Loan | 7,00,000 | 9 | 11,000 |
By consolidating through home equity, you save over ₹8,400 every month. It’s like giving yourself a raise!
How to Leverage Home Equity for Debt Merging
Here are two popular ways to use home equity:
- Home Equity Loan: You borrow a fixed amount against your equity.
- Home Equity Line of Credit (HELOC): A flexible credit line you can use as needed.
For instance, if you need ₹10 lakh to merge your debts and your property is valued at ₹60 lakh, you can borrow up to ₹12 lakh (20% of property value) depending on your lender.
Benefits of Using Home Equity
Let’s look at the advantages:
- Lower Interest Rates: Typically, home equity loans in India have rates between 8% and 10%, compared to 18%+ for personal loans.
- Single Monthly Payment: Streamline your finances with one EMI.
- Savings on EMI: Redirect those savings towards investments.
Example Scenario: If you save ₹8,000 a month on EMIs and invest it in an SIP yielding 12% annually, you’d have ₹11 lakh after 10 years.
Risks to Consider Before Leveraging Home Equity
Before proceeding, evaluate the risks:
- Foreclosure Risk: If you default on payments, you could lose your home.
- Fees and Costs: Processing fees, legal fees, and valuation charges can add up.
- Equity Reduction: Borrowing against equity means you’ll have less financial cushion.
A Step-by-Step Guide to Merging Debt
Follow these steps to merge debt:
- Step 1: Evaluate your total debts and monthly payments.
- Step 2: Calculate your home equity. Use this formula:
Home Equity = Current Market Value – Outstanding Home Loan - Step 3: Compare home equity loan rates from multiple lenders.
- Step 4: Choose between a home equity loan and HELOC based on your needs.
- Step 5: Use the borrowed amount to pay off high-interest debts.
- Step 6: Stick to a disciplined repayment schedule.
Tips for Successful Debt Consolidation
- Avoid overspending post-consolidation.
- Use savings to build an emergency fund.
- Monitor your finances regularly.
- Choose a lender offering low processing fees.
Also Read :- RBL Bank Net Banking
Alternatives to Home Equity for Debt Consolidation
If you can’t use home equity, consider these options:
- Balance transfer credit cards.
- Personal loans at reduced rates.
- Debt management plans through financial advisors.
Conclusion
Using home equity for debt merging is a strategic move to lower costs and simplify payments. However, it requires careful planning.
Always assess your financial stability before leveraging equity. Remember, your home is your safety net.
FAQs
1. What is debt merging, and how does it work?
Debt merging is combining multiple debts into one low-interest loan, often using home equity.
2. Can I lose my home if I fail to repay the loan?
Yes, defaulting can lead to foreclosure. Ensure timely payments.
3. How much can I borrow using home equity?
In India, lenders usually allow up to 80% of your property’s market value minus your outstanding loan.
4. Is a home equity loan better than a personal loan for consolidation?
Yes, due to significantly lower interest rates and longer repayment terms.
