Your Mortgage Loan: Consumer Debt Can Jeopardize Homeownership

[Jul 2, 2009.]

 

This week President Obama presented a proposal to Congress for a new federal agency assigned the task of protectecting consumers from practices designed to keep consumers in debt. As expected, financial insitutions are protesing the proposal. The president of the American Banker's Association noted, "It's going to be a long fight," indicating financial institutions' resistance to Obama's proposal. The New York Times notes that the new agency would have the strongest oversight powers over consumer lending to date.

Debt Burdened Homeowners Risk Foreclosure

Homeowners struggling with credit card debt, pay day loans and other credit accounts could risk losing their homes to foreclousre if they forego making mortgage payments to pay other creditors. Homeowners may be able to use home equity for paying debts.

Refinancing and Home Equity Mortgage Loan Options

Mortgage rates for refinancing and home equity loans are often lower than the annual percentage rates (APR's) of credit card debt and payday loans; check current mortgage rates here.  

Refinancing: This option involves applying for and paying costs for a new mortgage loan to replace an existing mortgage. Borrowers with sufficient home equity may qualify to take cash out for debt consolidation. It's important to include the costs of getting a new mortgage loan and the extended repayment period when calculating potential savings. A refinance mortgage for debt consolidation provides the benefit of rolling all debts into one monthly payment. Go here for more information on refinancing.

Home equity loans: A home equity loan is structured like a traditional mortgage loan for a specific amount of money to be repaid in installments according to terms outlined in the mortgage loan documents. Here's a link to information for home equity loan options.

Home equity line of credit (HELOC):This type of mortgage loan  can provide cash for debt consolidation and emergencies. A mortgage lender approves a line of credit for a specific amount, and homeowners can borrow what they need when they need it. HELOC's typically have adjustable rates, so potential savings can vary according to the APR's of consumer debt, the time it takes to repay the HELOC, and how HELOC rates may adjust. 

Risks of Home Equity Debt Consolidation

The total amounts  of original and home equity mortgage loans typically cannot exceed 80%. of a home's current value. Falling property values can quickly erode home equity; it's impossible to predict how real estate values will perform over the time it takes to repay mortgage loans.

Home equity loans can be foreclosed: As with a primary mortgage loan, home equity financing is secured by real property. A home equity lender can foreclose when payments are missed on the home equity loan, and they may also foreclose if payments on the primary mortgage are missed.

Temptation sabotages debt consolidation: Taking out home equity loans for debt consolidation can be a smart choice, but only if homeowners avoid incurring further debt.

Discussing debt management with a financial advisor is recommended for identifying appropriate  debt consolidation options.

 

About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.