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Home equity can aid you in consolidating your debt by offering a cheap source of funds and at the same time longer repayment programs so you don’t need to face high monthly payments. Moreover there are extra benefits that add up to these ones and should definitely be considered when deciding which kind of consolidation loan to go for.
Your home can help you consolidate debt. Using your home equity can be advantageous in many cases and provide the necessary funds for improving your debt situation. These include elimination of multiple small payments, lowering total payment amount, making debt tax deductible and paying off credit cards.
Different Equity Options
Refinance your home loan through a cash out refinance loan can provide you with funds from the equity on your home. Current interest rates make this an attractive option, more so if your payment is over 7.5% in interest for your outstanding mortgage. With a no-points loan, refinancing can enable you to drop payment and retrieve money without any costs.
Assume that your home is currently worth $100,000 and you owe $60,000, i.e. 60 percent loan-to-value. Up to $20,000 worth of home equity can still be accessed at approximately 7.5% and due to your LTV being under 80%, no mortgage insurance has to be paid. Ask your lender about the interest rate you are eligible for and pay off credit cards that cost 10 to 21%. As you can see, by refinancing there is no cost, only savings.
A debt consolidation loan provides the funds for repayment of credit card debt and lowers the interest rate you’ll have to face. Your debt should still be kept low and in case of extra money, save, invest or pay off mortgage early with any extra cash as prepayment of a consolidation loan usually has penalties.
If your current rate is not that high and you only want some money out of the equity in your home, go for a home equity loan, for only the amount you require. Interest rates for a home equity loan are typically higher than the first mortgage due to the higher risk for the lender. In the event that both mortgages could not be paid off, the first mortgage is paid first. Any money still remaining can be used to pay for the second mortgage.
Benefits of Debt Consolidation
Proper use of debt consolidation can offer you many benefits: it simplifies all the budgeting process as it offers a single monthly payment instead of multiple loan payments that can confuse anyone. Also, it aids you in reducing your debt in a speedy manner with fewer costs thus optimizing the use of your income.
Unfortunately in most cases it requires that you provide some sort of collateral usually consisting on a real estate property. In the event of default, the property is jeopardized because the lender can repossess the asset and claim his money through its sell. Thus, the risk involved for the borrower is significantly higher than with unsecured loans. Nevertheless, if you are sure you’d benefit from consolidation, you should go for it.
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