Debt Consolidation Equity Loan Review and Tips

Learn the smart way to use a debt consolidation equity loan.Tired of all the credit card debt you’re carrying? Want to combine that debt with your home loan?

Then a debt consolidation equity loan may be for you. They help you get rid of the high interest on your credit cards. But not only will you be paying lower interest rates, you only have one payment to make every month.

And if you already have a considerable amount of equity in the home, qualifying for this option is a whole lot easier than other loans.

First, however, you must learn how this option works and how to get the best deal you can possibly get. And that’s what this page shows you.

You’ll learn how this loan option works and how you can go about getting the most favorable rates.

How These Home Loans Work

Once you’ve established a history of timely mortgage payments and built up a fair amount of equity in your home, you can apply for a home equity loan that essentially uses the equity in your home as collateral for the loan.

This nets you lower interest rates associated with the secured debt on your home. You can pay off unsecured debt, like credit cards, as well as auto loans and other secured debt that have higher interest rates.

Before you dive in and decide this is the right solution for you, it’s a good idea to explore the pros and cons of using a home loan to consolidate debt.

What Are the Positives?

Naturally, one of the biggest benefits people get is the enormous relief they feel when eliminating large sums of unsecured debt.

For many people, the comfort of knowing they are paying much lower rates makes this a worthwhile proposition. But that’s not the only reason to consider this solution.

The other benefit is the tax break associated with your mortgage debt that you do not get for debts related to credit cards and auto loans. This can help you save even more money by saving on your yearly payment to Uncle Sam. Using your home’s equity to consolidate credit card debts can be a great tool for those who are financially disciplined.

You have to be disciplined enough to not only change some of your spending habits, but to also stick to a budget.

In some instances, homeowners who take out a home equity loan or line of credit and repay the loan quickly rather than extending it over ten years, find themselves paying far less interest over the life of the loan than they would have with credit card debt. Otherwise, you’re paying a lower interest rate over a far larger span of time.

The Costs and Risks of Equity Loans

Fees associated with consolidation equity loansFor some homeowners, the promise of a home equity loan seems much sweeter than the reality. In addition to the potential to pay more in interest over time, there are other costs involved in securing debt consolidation equity loans that are often overlooked, such as:

  • Closing Costs
  • Application Fees
  • Appraisal Fees
  • Document Preparation Fees

These fees only represent the upfront costs of the loan so keep them in mind in your calculations. The biggest risk of all, though, is your home. If you’re unable to repay this obligation in a timely manner, you stand to lose your home in the bargain.

Using a second mortgage isn’t the cure all that some make it out to be. If you’ve historically had significant problems climbing out of debt, then this type of borrowing option may not be the right answer, particularly if you don’t change your spending habits and behaviors.

One more important note…

A final consideration to keep in mind is that you lose the option to discharge unsecured debt in bankruptcy if you convert it into secured debt.

So the bottom line is that you need to be positive that you can make the monthly payments so you don’t default. You need to decide whether you can make the payments comfortably month in and month out.

You need some financial cushion in case an unexpected expense pops up.
Despite some of the drawbacks with this option, many homeowners feel like equity loans present a viable option for consolidating debt and easing the monthly financial burden. This loan option has worked for others and it can work for you too. You just have to be smart about it.