Leverage Your Home Equity for Debt Consolidation Loan
Nowadays, home equity loan rates and refinance loan rates are hovering between 6.5% and 7.8%. Even though they have climbed slightly over the last two years, these home equity rates are still substantially lower than the interest rates on other types of consumer credit. Many homeowners have enjoyed significant increases in home equity through appreciation over the last few years, making a home equity debt consolidation loan a viable way to reduce monthly overhead on debt payments.
A debt consolidation loan that is drawn again home equity is considered by many financial experts to be a shrewd and wise financial move on the part of homeowners. It allows the homeowner to transfer their high interest credit card debts, automobile loans, and other consumer loans to a much lower interest rate because the new loan will carry a much lower interest rate.
There are three primary kinds of loans that homeowners can use to tap into the equity that has accumulated on their property and leverage into a debt consolidation loan. They can choose to fully refinance their home, to take out a home equity loan, or establish a home equity line of credit. Each of these approaches has various considerations to take into account.
Some homeowners think that the simplest approach to doing a debt consolidation loan is to simply do a full refinance mortgage. In this scenario, they would borrow enough to cover the pay-off of their existing mortgage plus all of their other consumer debts.
The advantage of this approach is that it makes managing finances very simple, as all the debt payments would be reduced to one monthly mortgage payment. However, if interest rates on home mortgages have increased and are higher than the original mortgage, then this would not be the best approach.
If the existing mortgage loan rate is very attractive, then taking out a home equity loan, or a second mortgage, would be a good way to handle the debt consolidation loan that is desired. The proceeds from the second mortgage home equity loan would be used to pay off other consumer debts and the multiple debt payments would be transformed into the one payment.
The third option is to apply for a home equity line of credit (HELOC) which provides the flexibility and convenience of drawing on the equity in the home. Once a HELOC is established, the homeowner can use the available funds at any time to pay off other debts, to finance vacations, college expenses, or anything else they choose, up to the limit of the available credit that is established based on the amount of home equity.
These loans combine the convenience of a revolving credit account with the low interest rates of home equity loans and can be a good way to manage debts and also be prepared for emergency expenses that every homeowner encounters from time to time. Most lenders provide the homeowners with debit cards and convenience checks to access their home equity line of credit.
Another reason financial experts point to in recommending doing a debt consolidation loan that is secured by equity in your home, is that the interest on equity loans is tax deductible, while the interest on other types of consumer debts is not. The deducibility does depend on how you handle the filing of your taxes, so you should consult a tax professional about this process.
