Debt Consolidation Home Equity Loans - Advantages And Disadvantages
Written by: Carrie Reeder
Getting a home equity loan, or second mortgage, for the sole
intent of consolidating and ultimately eliminating unnecessary
debts is a great plan. Many consumers are burdened with high
credit card balances, consumer loans, etc. Reducing or paying
off debts takes time. Furthermore, many do not have the
disposable income to lessen credit card balances.
Owning a home places you at a huge advantage. Those who have
built equity in their homes may acquire a home equity loan as a
way to reduce debts. These loans are affordable, and serve a
useful purpose. However, debt consolidation home equity loans
have certain risks.
How Do Debt Consolidation Home Equity Loans Work?
The concept of debt consolidation home equity loans is simple.
Home equity loans are approved based on your home's equity. A
home's equity can be calculated by subtracting the amount owed
from the home's market value. Hence, if you owe $50,000 on a
home worth $120,000, the equity totals $70,000.
Once the lending institution approves your loan request, and the
money received, the funds are used to payoff creditors.
Creditors may include high interest credit card balances,
consumer loans, automobile loans, student loans, etc.
Furthermore, debt consolidation can used to payoff past due
utility bills and medical bills.
Debt consolidation loans are not free money. These loans have to
be repaid within a reasonable timeframe. On average, home equity
loans have short terms of seven, ten, or fifteen years -
sometimes less. Because home equity loans have fixed and lower
rates, these loans are easier to payoff than credit cards.
Pros and Cons of Debt Consolidation Home Equity Loans
The major advantage of home equity loans is the ability to
become debt free. However, home equity loans involve careful
planning. Once credit cards and other loan balances are
eliminated, closing credit accounts is a smart maneuver. This
way, you avoid accumulating additional debts.
Sadly, some consumers repeat past credit mistakes. Along with
paying a home equity loan, they acquire more credit card debt,
which increasing their debts and payments. Excessive debt makes
it difficult or impossible to maintain regular home equity loan
payments. This will present another home equity loan danger -
inability to repay the loan. A huge disadvantage of debt
consolidation home equity loans involves the risk of losing your
home. Before accepting a loan, realistically analyze whether you
can afford a second mortgage.
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