Debt Consolidation with a Home Equity Loan
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Home equity loans offer an advantageous solution for consolidating debt to homeowners. Two types of home equity loans are available which are a home equity loan and a home equity line of credit. A home equity loan is an installment term loan that features a fixed rate and monthly payment amount. The payoff date for the amount will be determined prior to loan disbursement and the money borrowed is received as a lump sum amount. An equity line of credit functions more as a revolving line of credit, comparable to a credit card. The interest rate for a line of credit varies based upon the prime interest rate and payments are initially a minimal amount. This type of loan allows the borrower to use the credit line for a specific period of time known as a draw period. Following the draw period the amount outstanding on the loan becomes payable and borrowers are responsible for repaying the remaining amount of the loan over a certain period of time. |
The amount of equity available is calculated by subtracting outstanding mortgage amounts from the value of the home. Financial institutions differ on what percentage of equity is eligible to be borrowed. Conservative lenders may only lend up to 80% of the value while others permit 100% of the remaining value to be borrowed. Factors considered in a home equity loan application include income of borrower(s), current installment and revolving debt amounts and those monthly payments, credit score, and value of the property. An additional advantage of home equity loans is that the interest may be tax-deductible depending on the borrower’s personal situation.
Home equity loans allow homeowners to make use of the available equity in their home and access funds for a range of reasons. Individuals that have a substantial amount of debt or anticipate a large expense in the near future such as a car or installing a pool may find it beneficial to choose a home equity loan that disburses the proceeds at a single time and then repay the amount over a fixed period of years. Conversely, for expenses that occur regularly such as medical bills, or if a borrower is interested in a lower monthly payment initially, a home equity line of credit might be more suitable.
Being able to access your home’s equity through a loan product provides an alternative source of cash for large expenditures or recurring bills that a borrower has trouble paying on their current level of income. Although interest rates for equity loans are higher than rates for first mortgages, they are usually significantly lower than those of credit cards or vehicle loans. Combined with a potential tax deduction, the lower interest rates for home equity loans allow a borrower to decrease the amount they are paying towards debt. Through consolidating debt an individual is able to make a single, lower payment to their home equity loan instead of writing multiple checks each month to various credit card and loan companies. It is essential however, that borrowers recognize they are securing the loan amount against their house and that if they fail to repay the loan their house will be at risk. Furthermore, the borrower who uses a home equity loan for debt consolidation needs to set strategies in place to ensure that the cards will not be used anymore.