The Rules for Home Equity and Debt Consolidation

A mounting pile of credit card statements. Making just the minimum monthly payments. A credit score that drops a few points each month. If this sounds like your financial situation, take advantage of the equity in your home. Low current mortgage rates might just help you out of your dilemma.

Home equity is perhaps the most valuable financial tool that you have to relieve some of the stress of credit card debt. If used properly, you can leverage the equity in your home to consolidate your bills into one low monthly payment. And depending upon where you live, current mortgage rates will make the deal even sweeter. Here are some things you should keep in mind if you're considering consolidating your debt using home equity.

Home Equity Guidelines

• Staying Power. You should only exercise the power of home equity if you plan on staying in your home for several years to come. If you consolidate and then try to sell too quickly, you'll have to repay the portion of your equity that you utilized. This is how many homeowners become "flipped," where the value of the loan exceeds the value of the home.

• Find the Best Rates. Current mortgage rates should factor heavily in your decision to consolidate. When you refinance, the rates in your area will determine the amount you must repay. Striking while the iron is hot is the key to getting that low monthly payment that most lenders advertise.

• Choose the Right Mortgage Product. There are several options for refinancing. Fixed versus adjustable rate mortgages vary greatly in their effect on your financial future. Selecting an adjustable rate mortgage might cost less in the beginning; but if the rates change, you could see your payments rise considerably.

• Taking Cash Out. According to Fannie Mae, most lenders will require you to have at least 5% equity accumulated in your home before they allow you to take cash out of the transaction. This is a critical factor to consider, as consolidating may force you to take on more debt as opposed to relieving it.

By Kelly Richardson