By Michele Lerner
Mortgage Credit Problems Columnist

If you have debt problems -- credit card balances that seem to just keep growing, for instance -- a home equity loan is a possible way to get a more favorable interest rate to help you become debt-free sooner.

Home equity loans typically have a very low interest rate, particularly when compared to credit card debt, so it can be very tempting to turn to a home equity loan to solve credit problems. On the positive side, homeowners can use the value of their home to pay off high interest debt. On the negative side, if you tap home equity with a mortgage and use that to pay off your credit card debt, you've turned unsecured debt into debt that is tied to their home. If you cannot pay back the home equity loan, you're in danger of losing the property to foreclosure.

Qualifying for home equity loans

Homeowners need to meet several standards before obtaining an approval for a home equity loan.

1. An appraisal. Your home must have enough value so that you have significant equity (at least 10 percent or more, depending on the lender) to allow you to borrow against it. It's no secret that home equity has dropped across the country in recent years. If you're not sure what has happened to your neighborhood, check home prices in your neighborhood online. Don't rely on those home estimates, which can vary widely, but use it to get a sense of home price trends near you.
2. Decent credit scores. While this may seem counterintuitive since you intend to improve your credit and financial health by paying off your debt with the new loan, past credit problems can hurt your ability to get a home equity loan in the first place. If you have managed to maintain a decent credit score in spite of credit card debt, you may still qualify for a home equity loan.
3. A low debt-to-income ratio. Any home equity lender needs to be certain that you will be able to repay both your first mortgage and a home equity loan before approving more borrowing.

If you think the lower interest rates on a home equity loan may be helpful in resolving your bad credit or debt issues, find out if you qualify by entering your basic information online and having mortgage lenders contact you.

Using home equity loans wisely

If you do qualify for a home equity loan, you must be careful to use the funds wisely. Consult with a credit counselor to develop a new budget so that you do not fall again into the trap of overspending. If you are able to reduce your monthly bills through the use of a home equity loan, use the extra cash to pay down any remaining debt, then tackle the home equity loan to pay that in full as soon as possible.

A home equity loan, if used carefully, can be the beginning of resolving your debt problems, but homeowners need to be certain they will follow through to eliminate their consumer debt and begin building a solid financial future.

Other Recommended Home Equity Loan Articles

• Is a home equity loan right for you?
• Home equity loan: Why lenders are skittish
• Home equity debt solutions