Debt Consolidation with a Home Equity Loan
One of the most popular methods of debt management is debt consolidation. And, in many cases, this consolidation is carried out through a loan. When you get a debt consolidation loan, you take out one large loan and then use that money to pay off your smaller debts. And one of the ways to get the largest amounts of money, with the lowest interest rates, is to turn to a home equity loan.
Home equity is basically how much ownership you have in your house. If you take the market value of your home and subtract what you owe on it, what is left is the amount of equity you have. If you have a $195,000 left to pay on a house that is worth $235,000, you have $40,000 of equity. If you take out a loan against your equity, then you can use that to pay off your debts.
Benefits of debt consolidation with a home equity loan
When you take your home equity loan, which is basically a second mortgage, you will find that the interest rate is lower. Additionally, the second mortgage interest you pay can also be tax-deductible in some cases. This can be a real benefit. Additionally, your debt management because simpler, since you only make one payment now, and have one lower interest rate.
Cons of debt consolidation with a home equity loan
It’s not always best to use a home equity loan second mortgage for debt consolidation, however. Remember: when you secure a loan with the equity in your home, you are putting your biggest asset at risk. If something happens and you are unable to make payments, you could lose your house. With unsecured debt, your home is safe, even if you declare bankruptcy.
Also, if you so not practice discipline in changing your spending habits, debt consolidation can make matters worse. An important part of debt management is to STOP the behaviors that put you into debt. If you do your debt consolidation with a home equity loan, it is vital that you do not build up any more credit card debt on those newly-paid-off cards.
Carefully consider your position before you decide to put your home on the line as part of debt management. There are other options and solutions, and you should consider which would be best for you.
August 17th, 2007 at 1:33 pm
[…] main thing to be wary of is the fact that you are putting your home on the line. A home equity loan for debt consolidation may be risky, since you are taking unsecured debt and turning it into secured […]
August 17th, 2007 at 1:42 pm
[…] to a lower interest rate? Or do you strictly want a cash out refinance? Will you be using your second mortgage for debt consolidation? It is important to understand that a 2nd mortgage is a new home loan, and that a credit check is […]