How To Approach Debt Consolidation with a Home Equity Loan

[Feb 16, 2009.]

 

Compare The Interest Rates On Your Debts With Current Mortgage Rates
As a homeowner, you can often take advantage of relatively low mortgage interest rates.  Compared to the interest rates on other debts such as credit card debts, car loans, and medical bills, mortgage rates are typically quite lower and can yield considerable savings.  A common example is when homeowners take advantage of their home's equity to pay off high interest credit card debts which hold an APR interest rate close to twenty percent. By refinancing your existing mortgage or requesting a home equity loan, individuals can transfer these balances into a low interest mortgage loan and pay off their debts much quicker.

Don't Confuse Debt Consolidation With Debt Elimination
It's important to understand that consolidating any kind of debt through a home equity loan does not mean the debt is eliminated. Instead, the balance of the paid off debt will now be in the form of a mortgage; typically a traditional home equity loan or home equity line of credit. Although most homeowners acknowledge this fact, transferred debts can sometimes cause individuals to subconsciously feel as though there debts have been entirely paid off. If you end up consolidating your debt with a home equity loan, you'll save money on interest -- but you'll still have obligations to pay back those debts.

Realize The Risk Of Secured Debts And Putting Your Home at Risk
Certain kinds of debt are secured in different ways and it's important to understand how mortgages are secured. When you take out a mortgage or home equity loan, the loan is secured by your actual home. If you don't pay the loan, the mortgage lender can actually seize your property to fulfill the unpaid debt. On the other hand, other loans such as car loans may be secured by the vehicle itself, while many credit cards are not even secured at all. If you end up consolidating your debts with a home equity loan, all these debts will now be secured by your home. At this point, if you end up missing payments on your new home equity loan, your home is now at risk.

So before consolidating any debt with your home's equity, be sure that you can afford to pay back these debts.  While some individuals could potentially save thousands in interest, some also need to realize that risking their home may not be worth the potential savings.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.