Home equity loans for debt consolidation:
Though very similar to a home mortgage, a home equity loan does not carry
some of the usual fees and charges that you need to pay for
a home mortgage. The borrowing is based on the equity of your
house serving as the collateral for the loan, and the repayment
is stretched over a period of time as per the fixed schedule.
The home equity loan is very similar to a second mortgage and
the only difference that may seem from the outside is just a
matter of semantics. As far as lenders are concerned, they usually
differentiate between these two on the basis of the purpose
for which the loan is taken. A second mortgage, according to
them, is usually a loan which is for the purpose of increasing
the value of the house by making improvements or additions.
On the other hand, they believe that a home equity loan is when
the borrowed money is to be use for other types of expenses
such as purchasing of a car or paying for the tuition.
However, the difference between a second mortgage and the home equity loan lies in the financial aspect, a home equity loan is free from origination fees and closing costs which have to be paid in case of a second mortgage. Also the processing procedure for a home equity loan is much simpler and faster.
Debt consolidation with home equity:
With the inflation index always rising and everything becoming dearer, most U.S. citizens end up picking debts from various sources such as making big purchases against their credit cards, taking up car loans, private student loans and personal loans. And very often, to pay off one debt they may have to borrow from somewhere else, till the time their finances are in a real upheaval. Caught in the mayhem, they find it difficult to pay back the loans and consequently increase their debts further and their credit ratings tumble. Fortunately, a debt consolidation using home equity loan can offer a pertinent solution.
With debt consolidation through home equity loans, which is a rather inexpensive solution, you can settle each of your outstanding debts and enjoy a pleasing rate of interest and reasonable monthly payments.
A debt consolidation home equity loan is a secured loan, with your house acting as a security for the borrowed amount. And because of the security feature the lenders offer you interesting interest rates. With all your debts cleared out, happiness and financial balance are restored to your life, chasing the creditors and bankruptcy away.
Though your outstanding balance remains the same, your monthly payments shrink
considerably when you compare them with all the different payments
you were making earlier and alongside you save money because
of the reduced interest rate.
The tax advantages:
Another unique feature of borrowing against your home is the inherent tax advantage. If the total amount of your borrowings made against your house do not exceed hundred percent of the value of the house, then the entire amount of interest that you pay over the loan in a year is eligible for tax deductions. Irrespective of whether you use a second mortgage or a home equity loan, some tax deductions will surely come your way.
To begin with consolidation, collect details about all your outstanding debts from all the lenders, because you will need this information to get the monthly payment quotes from the home equity consolidation loan lenders.
Familiarize yourself with the risks:
While the home equity loan comes with endless benefits to take care of your short term financial needs, but getting rid of your debts with such a loan should not be misinterpreted as unlimited financial freedom. You are still liable to pay back the entire amount, and your house is at a risk till every dollar is paid back. Here is a list of four most common home equity loan traps that the homeowner can encounter:
1. Paying back: When you have any unsecured loans or credit card balances which you are unable to pay back, only your credit ratings get affected or at the most you may have to declare bankruptcy. But with the home equity loan your house is at a stake and any defaults in this can make you lose your house.
2. Prepayment penalties: Home equity loans come with lower closing costs and at cheaper interest rates, but most of them have a clause for prepayment penalties wherein you will be penalized for repaying before time. So in case you have plans of paying off the home equity loan before the introductory period expires, then you will have to pay the lender a huge fee which will take away all your savings.
3. Flexibility can be killing: with some home equity loans you have the flexibility of deferred payments which allows you to make minimum payments when you cannot afford the appropriate monthly payments. But, this will just take you deeper into debts, because your loan balance will keep on increasing because of the deferred payments and when it increases out of proportion you may not be able to pay back and will end up losing your house.
4. Overly generous lenders: there are some lenders who would encourage you to borrow much more than the value of your property, but dont think that hes being generous. Rather be critical and understand the consequences of borrowing more than the value of your property.
The final tip:
Once all your debts are paid off; it is time to discipline yourself in handling
your finances so that your financial situation does not deteriorate
any further. First of all, get rid of some of your credit cards
and just keep one or two for emergency use only. And secondly
start budgeting and planning your expenses in relation to your
income and of course you need to be regular with your monthly
payments for the home equity loan.
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