Debt Consolidation Home Equity Loans – Advantages and Disadvantages

Getting a home equity loan, or second mortgage, for the sole intent of

consolidating and ultimately eliminating unnecessary debts is a great

plan. Many consumers are burdened with high credit card balances,

consumer loans, etc. Reducing or paying off debts takes time. Furthermore,

many do not have the disposable income to lessen credit card balances.

Owning a home places you at a huge advantage. Those who have built

equity in their homes may acquire a home equity loan as a way to reduce

debts. These loans are affordable, and serve a useful purpose. However,

debt consolidation home equity loans have certain risks.

How Do Debt Consolidation Home Equity Loans Work?

The concept of debt consolidation home equity loans is simple. Home

equity loans are approved based on your home’s equity. A home’s equity can

be calculated by subtracting the amount owed from the home’s market

value. Hence, if you owe $50,000 on a home worth $120,000, the equity

totals $70,000.

Once the lending institution approves your loan request, and the money

received, the funds are used to payoff creditors. Creditors may include

high interest credit card balances, consumer loans, automobile loans,

student loans, etc. Furthermore, debt consolidation can used to payoff

past due utility bills and medical bills.

Debt consolidation loans are not free money. These loans have to be

repaid within a reasonable timeframe. On average, home equity loans have

short terms of seven, ten, or fifteen years – sometimes less. Because

home equity loans have fixed and lower rates, these loans are easier to

payoff than credit cards.

Pros and Cons of Debt Consolidation Home Equity Loans

The major advantage of home equity loans is the ability to become debt

free. However, home equity loans involve careful planning. Once credit

cards and other loan balances are eliminated, closing credit accounts

is a smart maneuver. This way, you avoid accumulating additional debts.

Sadly, some consumers repeat past credit mistakes. Along with paying a

home equity loan, they acquire more credit card debt, which increasing

their debts and payments. Excessive debt makes it difficult or

impossible to maintain regular home equity loan payments. This will present

another home equity loan danger – inability to repay the loan. A huge

disadvantage of debt consolidation home equity loans involves the risk of

losing your home. Before accepting a loan, realistically analyze whether

you can afford a second mortgage.

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