Debt consolidation is usually the best solution if this is carried out using a home equity loan. With the debt consolidation home loan you can put together your high interest credit card balance, car loans, personal loans and similar other debts, into an inexpensive, lower interest home equity loan with affordable monthly payments.
A home equity loan that you will use for debt consolidation is a secured loan with your property acting as the security for the loan. Until the time you pay off the total amount of the home equity loan, your lender will have a lien on your property. It is a second mortgage. Even though your house remains pledged with the lender, you are still able to get rid of your creditors and prevent declaring bankruptcy.
The benefits:
Consolidation gives you a great savings opportunity because you are using a relatively inexpensive source of funds to get rid of those expensive debts. Not only will you end up paying a much lower amount for the interest over the debts but also there would be a significant reduction in the monthly payments. Even if you maintain the same repayment term, this one monthly payment would be lower than all the monthly payments that you were making earlier because of the change in the rate of interest.
Using the home equity debt consolidation home loan also has some tax benefits, as the interest that you pay over such loans may be tax deductible. This tax benefit is not associated with most of the other types of debts such as credit cards, personal loans and car loans. To get the tax benefit, never let your total borrowings against the house be more than the appraised value of the property.
Debt consolidation using your home equity can also help you to steer clear of your bad credit ratings, since all your high interest loans appear to be settled out on your credit report. Further by making regular monthly payments for your debt consolidation loan you can further increase your credibility in the market, which will entitle you to better financial deals in the future. We all know that the higher your credit score the better interest rate terms you will be offered.
Banks and lenders show an increased preference for debt consolidation loans that are backed up by home equity for two reasons:
Debt consolidation is often viewed by financial institutions as an effort on part of the borrower to sort out his financial problems, thereby he is assumed to be a more responsible borrower.
A good amount of equity in the house denotes a concrete financial plan, and at the same time the lender gets a reassurance that his money is safe and will be paid back. In case the borrower defaults in paying back, the lender can make good his loss by selling off the property.
When going in for a debt consolidation home loan, be particular about not picking up any other debts till this loan is completely cleared out or else you will only end up increasing the risk on your house. For expensive debts such as credit cards, which usually carry a double digit interest rate, paying off the balance using a home equity debt consolidation loan is an excellent answer.
