Saratoga Springs – Is a Debt Consolidation Home Equity Loan Right for You?
Is a Debt Consolidation Home Equity Loan Right for You?
Maybe you’ve indulged in impulse shopping one too many times or actually found yourself in an emergency where paying with a credit card was the only option. Either way, if you’re a homeowner who is struggling to pay those monthly bills, debt consolidation could make sense for you.
Homeowners who have equity in their homes but whose debt load has become difficult to manage are good candidates for debt consolidation loans. A debt consolidation loan allows you to pay off high-interest consumer debt, such as credit cards, by centralizing those balances with one lender in one loan. This means that you can merge a home mortgage payment, a car payment, a student loan payment and credit card debt into a single larger loan. One way to consolidate is through a home equity loan.
What is a Home Equity Loan?
Equity is the difference between the value of your home and the money you still owe on your mortgage. Sometimes referred to as a second mortgage, a home equity loan allows you to borrow against the equity you have built up in your property. With a home equity loan, your home is used as collateral for your debt consolidation loan. This type of debt consolidation allows you to benefit from mortgage interest rates that are typically lower than rates for other types of debt.
Another benefit of a home equity loan is that in most cases, interest paid is fully tax deductible.
Uses for Consolidation Loans
A debt consolidation loan lets you lower your monthly payments by combining your debt into one loan. With lower monthly payments, you can strengthen your cash flow, which will free up money for other uses. The surplus can be used to pay down your mortgage principal, allowing you to pay off the total amount owed in a shorter period of time.
Also, debt consolidation loans often have longer terms than other loans, giving you more time to pay off the money you borrowed.
People get home equity loans for a variety of reasons, including making home improvements, paying for college education or medical expenses, or buying a new car. However, home equity loans should not be used to pay for clothing, entertainment or minor repairs, according to Kathy Sweedler, consumer and family economics extension assistant with the University of Illinois.
Costs of Refinancing Home Equity Loans
While you might hear a lender advertise for “no-cost refinance,” often no-cost refinancing simply means the costs have been included in the amount of the loan.
Home equity loans usually have the same costs and fees applied to them that buying or refinancing a house does. When you refinance your home equity loan, you will often pay closing costs, application fees, attorney review fees, appraisal fees and more. Some lenders will waive these fees. However, some costs may still apply.
Orson Klender, Licensed Associate Broker; Keller Williams Real Estate
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