Debt Consolidation Home Equity Loans

Managing a number of debts is a challenging prospect for most people. Every month, a part of our monthly income goes towards paying off mortgage loans, credit card bills, student loans, car loans, etc. Out of these loans, the payment that we make towards our mortgage loan is one of the largest and most important one. However, homeowners are in a unique position to use the equity in their homes to manage their other debts. Home equity loans – as these are commonly known – can offer an opportunity to homeowners to utilize the equity that they have built in their homes. 

What is a Home Equity Loan?

Simply put, a home equity loans is a one-time lump-sum payment offered to a homeowner by a lender based upon the equity of the homeowner. In other words, it can be said that the equity is used as collateral by the lenders offering the home equity loan. Home equity loans are also known as second mortgages.

Why Should I take a Home Equity Loan?

Well, home equity loans can benefit those homeowners who are paying a high interest rate on their credit card debt, auto loan, student loan, etc. By using the equity in your home, you can clear off all your existing debts, and instead make a single payment on your mortgage. Home equity loans are extremely beneficial for those people who are locked into a higher interest debt. As the rate of interest charged on a mortgage loan is significantly lower than that of a credit card, a home equity loan can work very well for some people. Many homeowners are increasingly applying for a home equity loan as it is a great way of consolidating your debt. Another way in which a home equity loan is beneficial for homeowners is that the interest paid is tax deductible. 

Are there any Pitfalls?

Well, as is the case with most loans, there are a host of charges associated with home equity loans. Transactions costs, processing fee, closing cost, etc. mean that you end up paying a lot of money to get the loan. Another point that you should keep in mind is that by taking a home equity loan, you are increasing your debt to asset ratio. After spending years on building a stake in your home, you have to start from scratch. 

Home equity loans might be the right way of debt consolidation for some, while others might be better off without taking it. I guess, in the end, it all boils to the financial needs of an individual. Our advice to all the readers is that they should weigh in all the options before taking the plunge into home equity loans.