Getting Out of Debt Using a Home Equity Line of Credit

Relieving yourself of credit card debt can be challenging. In addition to strong budgeting and strict spending discipline, you may need to figure out a way to reduce or eliminate interest charges, late-fees and over-limit fees. Consolidating your debt, in many cases, is a fantastic way to jump-start a debt repayment plan. One of the lower-interest consolidation loans is the HELOC, or home equity line of credit. Acquiring a HELOC is relatively simple, so long as you meet the requirements of the lender.

Step 1

Pull a recent copy of your credit report. You'll need to know where you stand--in terms of total debt and credit worthiness. See Resources for a free copy of your credit report.

Step 2

Seek to improve your credit report if you have any serious credit issues. These issues include: charge-offs, any existing delinquencies, liens or judgments. You should pay or clear any of the previously mentioned items before seeking a HELOC loan.

Step 3

Determine which bills you hope to include in the consolidation. Review all monthly statements and your interest rates. Including loans that have high interest rates is a common solution to debt repayment. You should also call all creditors and simply ask for a lower interest rate--you never know how low they'll go.

Step 4

Determine how much equity you have in your home. If you are maxed out on your house, you'll be disqualified for nearly all HELOC loans. To figure your equity, simply subtract your mortgage balance from the value of your home. You'll also need to do a loan-to-value (LTV) calculation. Most lenders shy away from lending to borrowers with higher than 95 percent LTV. To figure your LTV, divide your mortgage balance by the appraised value of your home.

Step 5

Make sure you can afford a new loan. Do a debt-to-income (DIR) calculation. To figure your DIR, divide all monthly expenses by your gross monthly income. Since you'll be consolidating debts, though, you can leave those payments out of the calculation. But, you must enter an estimated HELOC payment as a substitute. To find a payment estimator, see Resources.

Step 6

Begin researching lenders. Your credit score will determine which lenders you should look at. For example, if you have a credit score above 720, which is excellent, you should look exclusively at banks and credit unions. Both of these offer the most competitive programs and rates. However, with a score below 680, you may need to look at finance companies, such as CitiFinancial.

Step 7

Make sure to get at least two or three loan options before committing to one lender. Compare all options side-by-side and make a decision based on your goal--which in your case is debt elimination.