Pros and Cons of Using a Home Equity Loan to Debt Consolidate
A home equity loan can be used to consolidate debt. The big question, however, is whether it should.
You might be interested consolidating debts if you owe money to many creditors how it works.
Consolidating debt involves getting a new loan to help pay off existing debts.
If approved for your new loan the proceeds will be used to pay all creditors you owe money. Instead of having several loans with different monthly payments and interest rate, you will only be responsible for the new loan.
When consolidating debt, it is important to consider what type and amount of loan you’ll get. You have many options but a home equity loans is the most common. Be sure to carefully consider the pros & cons of consolidating debt through this type of loan before you borrow against your house.
Consolidating debt and obtaining a home equity loan are two of the many advantages
Your home serves as collateral in a loan secured by your equity. The amount that you can borrow will be determined by your home’s appraisal. The best benefits of consolidating debt using a home equity line of credit are:
- The interest rate on home equity loans is usually lower than other loans. A home equity loan can make it easier for you to qualify for a loan which lowers your current debt rate.
- Lower monthly payment: Most home equity loans are paid off over a longer period of times. Because of this, your monthly payment will likely be lower than it would if you kept your current debts or took out a consolidation loan. It can allow you to be more flexible with your budget by lowering your monthly repayments.
- The predictable payment process: As long your fixed-rate home equity loan is in place, you will know the total cost of repaying your debt. Also, you’ll have an idea of when your debt is due to be paid so you’re aware of it.
Consolidating debts with a home-equity loan comes with its own set of disadvantages
While these advantages can make a home-equity loan attractive, there are also some downsides.
- In most cases, your interest is not tax deductible. However, you can itemize to make the interest on mortgages tax-deductible. Interest on home equity loans cannot be deducted if it is used to improve your home. You may not be able, however, to deduct interest from other debt consolidation loans.
- The fees and costs associated with a home equity loan are more expensive than other types of loans. This could include the cost for an appraisal or loan origination fees.
- Getting approved for loans can be slow: Although it’s possible to get approved for personal loans or balance transfers in as little as a few days or hours (or even minutes), it can take weeks or longer to get through the home equity approval process.
- To have equity in your home, you need equity. Equity means the property’s market value minus your mortgage debt. Many lenders restrict the combined amount of your mortgage loan and home equity loan to 90-95% of your home’s total value.
- You put your home at stake. Your home is your security deposit for your equity loans. In other words, your home could be taken away if payments are not made on time. The other types are not as harmful to your house.
These drawbacks often outweigh the benefits. Consolidating debt is easier with personal loans than balance transfer credit cards. It is important that you carefully review each type of loan you are considering so you can make an informed decision about which one is best for your needs.
An historic opportunity to potentially save thousands upon your mortgage
Most likely, interest rates will not remain at multi-decade levels for very long. It is imperative to act immediately, whether you are looking to refinance to lower your mortgage payment, or to purchase a new home.