Debt consolidation allows debtors to restructure their finances and get their cash flow back in order. Sources of funding include debt consolidation loans from debt relief companies, personal (unsecured loans), secured loans, credit card loans and other types of loans.
However, the best debt consolidation loan that you can get is a home equity loan. Home equity loans allow debtors to tap into the finance built into their home equity. Usually a bank or similar financial institution will use home equity as collateral and extend a loan or credit to a home owner.
You can get many more benefits from using a home equity loan as a consolidation loan, but the single drawback that you could get from defaulting on your home equity loan could mean that you are out of a home. Therefore, you need to be careful enough to be able to repay the home equity loan.
How do home equity loans work?
Usually the value of your property will first be determined and then the financial institution that is extending you the home equity loan will decide on the value that it can extend to you as a loan.
The two main factors that will determine how much money you on borrow on your home equity and at what interest rate, are:
• The combined loan to value or CLTV should be between 80% and 90%
• Your credit score and payment history on previous credit should be good.
The home equity loan can pay off other debts such as:
• Student loans
• Credit card debt
• Car loans
• Personal loans or
• A combination of these loans and other types of loans
The main reason for consolidating your other loans under a home equity loan is that the loan will have a much lower interest than the other types of loans.
Benefits
1. It is an easy loan to acquire once ownership of your title is established and the value of your property is clear.
2. The interest on home equity loans is deductible because as you make more and more payments the total value that is charged on the interest keeps reducing.
Drawbacks
1. The single major drawback of taking a home equity loan is that, if you fail to pay the loan then you could lose your home.
2. If you lose your home through foreclosure, because of defaulting on the loan, this can also negatively affect your credit score in a very detrimental way.
3. One of the consequences is that you will not be able to take any other type of unsecured loan from a financial institution until you repair your credit score.
To avoid such consequences as a home owner, you should do your financial analysis carefully and ensure that you can afford to pay for your home equity loan reasonably easily, each month, for the foreseeable future.
If possible, you should make extra payments when you can so that you can complete the loan sooner than later.
