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10 ways to
pay off debt... Page 3
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8. Obtain A Home Equity Loan.
If you own a home and have accumulated equity throughout the years, you might consider a
home equity loan, also called a second mortgage. Many lenders allow you to borrow against
a certain percentage (usually 80%) of the equity in your home. For example, if you owed
$50,000 on a house that was appraised at $150,000, your equity would be $100,000 ($150,000
- $50,000). You'd be able to borrow up to $80,000, or 80% of $100,000.
You can use this type of loan to pay off all your outstanding debts and start paying only
one monthly payment at a lower interest rate. The interest on home equity loans is
generally tax-deductible if you itemize on your income tax return. You're effectively
getting one of the cheapest rates for personal consumer debt.
This type of debt consolidation is not for everyone however. It only works if you stay
disciplined and avoid charging up your cards again. The last thing you want to do is have
credit card bills to pay on top of the home equity loan payments you've just established.
9. Borrow From Your 401(k).
Check the literature of your employer's retirement plan to see if you can borrow against
your 401(k) balance. Most plans allow you to borrow up to 50% of the account's value of
$50,000, whichever is lower. In most cases, you'll have up to five years to pay the loan
amount back and the interest rates are reasonably less than credit card rates. The good
news: you not only borrow from your account but the interest you pay also goes back into
your account, not the lender's.
Before you pursue this strategy, take a look at a few of the disadvantages:
- You lose the earning
potential of the money you borrowed.
- The interest that you pay on
the loan is deducted from your paycheck with after-tax dollars. The interest will also be
taxed again when you withdraw money from your 401(k).
- If you leave your employer
before your loan is repayed, the entire balance on the loan may be due in a short period
of time. The balance of the loan will be reported as a distribution to you and will be
taxed as ordinary income. If you're under 59-1/2 you will be subject to a 10% early
withdrawal penalty as well.
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