Should you use a home equity loan for debt consolidation?

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If you are a homeowner who has taken on too much debt, a financial product known as mortgage loan can help you avoid this.

While taking out a home equity loan can be risky – after all, your home is used as collateral for the loan – the rates on the product are usually lower than on credit cards or personal loans.

“As long as you have a stable source of income and know you can pay off your loan on time, the lower fixed rates on home equity loans make them a smart choice,” says Richard Ortoli, co-founder of the New York law firm Ortoli Rosenstadt LLP… “However, it is imperative that all payments be made on time to avoid putting your home at risk.”

Here’s how you can determine if a home equity loan is the right choice for debt consolidation.

What is a home equity loan

Often seen as a second mortgage, “A home security loan is a flexible loan secured against your home that typically complements an existing mortgage,” the report said. Alex Klingelhöffer, a welfare advisor at a national consulting firm, Financial Wealth Consultants… Here is a hypothetical example provided by Klingelhöffer:

  • House bought for $ 250,000 in 2015
  • An initial payment of $ 50,000.
  • Five years later, in 2020, the value of the house is estimated at $ 350,000.
  • Remaining $ 180,000 on mortgage
  • As of 2020 in this example Justice the property is now $ 170,000.
  • “Banks will allow you to borrow money for this amount. [the equity] through a loan secured by home equity or home equity credit line (HELOC)“, Says Klingelhöffer.

Both loans secured by real estate and HELOCs use your home equity so you can borrow money. However, HELOCs work more like credit cards. Whereas home equity loans allow borrowers to withdraw a lump sum and then repay the loan through fixed payments in fixed interest rate… HELOC have variables interest rates with non-fixed payments.

Because you use your home as collateral for a loan, interest rates on home equity loans are usually lower than on other types of financing, especially credit cards. However, failure to pay the fixed monthly payments on time can result in the lender seizing your home and ultimately losing the foreclosure.

Can I use a home equity loan for debt consolidation?

Loan secured by equity capital borrowers can withdraw a lump sum and use it as they see fit. Secured real estate loans can be a great way to get money up front to pay high interest rate bills in one fixed installment.

Home loan interest rates usually lower than many high interest loans such as credit cards. If you are looking to save on the difference in rates, then a home equity loan may be a good option for consolidating and paying off debt.

Professional advice

A secured home equity loan can be a good option for consolidating your debt. But since your home is at stake, you should only take this type of loan if you are confident that you can make the payments.

A caveat is that you need to make sure that you can make payments on the loan. Failure to meet payment obligations could mean the loss of your precious collateral – your home. It is very important to make these payments on time to avoid escalating or increasing debt, Ortoli said. “A home equity loan should only be used for debt consolidation if you have a stable source of income and are confident that you can make all payments on the new loan,” Ortoli says.

Weighing the pros and cons of home equity loans for debt consolidation

pros

  • Interest rates usually lower than other loans.
  • Eligibility for a loan may be easier because it is secured debt, Ortoli says.
  • The ability to shop on the best terms and at the lowest interest rates between different financial institutions
  • Funds are received in a lump sum, so borrowers can immediately pay off large debts and other expenses.
  • There is no stipulation on how to use the borrowed funds.
  • The rates are usually fixed.

Minuses

  • Providing your home as collateral when failure to pay could result in the lender placing collateral on your home.
  • Easy access to a loan may mean that it is too affordable for the financially unprepared, Ortoli said.
  • If the value of a home falls, home equity loan borrowers may end up indebted more than their home is worth, leaving them in an even bigger pit.
  • This is a loan on top of an existing mortgage.

Alternative Ways to Consolidate Debt

“Ultimately, consolidation is a powerful strategy, but think of it as a treatment, not a cure,” says Klingelhöffer. “The real cure is to get a positive cash flow and pay off the debt to an acceptable level.” Freeing up monthly cash can also allow funds to be channeled into an emergency fund and retirement. Many experts will say it is important to start as early as possible as a positive step in increasing wealth.

If you don’t want to risk your home collateral but want to free up cash flow and consolidate debt, there are several alternative ways to consolidate debt.

Credit card for balance transfer: Some balance of transfer cards We offer an initial interest rate of 0%. Most of them range from 12 to 18 months before the annual interest rate takes effect. Multiple debts can be transferred to the card. If you pay off your card balance before the end of the introductory period, all your payments will go 100% towards the balance, not the balance plus interest. This strategy can help you pay off debt faster and save on the total amount of interest. Depending on the issuer, there may be restrictions what type of debt can be transferred if the loan against equity capital does not specify how to use it.

Personal loan: BUT personal loan may be the best or worst option depending on the annual interest rate you are applying for. If a personal loan is not secured, this means that you do not have to use your home as collateral. And if you can provide individual loan rate lower than your home equity rate may work in your favor. Generally, you can use your personal loan funds in any way you like. However, beware of creation fees and early payouts.

Debt management plan: If you have unmanageable debt and need help choosing your options, a reliable credit counseling agency can help you. We recommend using an agency qualified through National Fund for Credit Counseling

Debt repayment plan: Through debt settlement service can help in the process of writing off your debts. However, the service is paid. Ultimately, you do not need to pay for this service, as you can contact creditors directly and ask them to discuss or settle the debt yourself.

Refinancing: Interest rates are now low, so if you own a home, you can take advantage of the new favorable loan terms. Refinancing a mortgage for more than 30 years can allow you to spread the loan balance over 30 years versus 10 years, as in the case of a home loan, says Chuck Seagull, founder of a financial consulting firm Macro money concept in Florida. If refinancing lowers your monthly mortgage payment, you can use the freed up cash flow to pay off debt.

BUT cashing refinancing can also work by taking out a new mortgage that is larger than the outstanding amount, but getting a check for the difference to use at your discretion when closing. Refinancing the entire mortgage and taking out the capital needed to pay off any debts is an option that should be considered, Chaika says. Pay close attention to closing costs… Closing costs can outweigh the cost of your debt.

How to get a home equity loan for debt consolidation

If you’ve decided that a home equity loan is the best option for you, here’s where to start.

  1. First, it’s important to know how much is your houseso you know how much home equity you have.
  2. Check your credit score and take steps to increase it so you can get a better rate.
  3. “You can get a home equity loan to consolidate your debt by first contacting the bank where your mortgage is kept,” Chaika said. “This bank probably knows you and can help you get through the mortgage loan process faster.”
  4. Buy and Compare best rates, terms and fees before applying with at least three creditors.

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