While borrowing against your house is one of the cheapest ways to borrow money, it is still a risky proposition.
Most people are use to the prices of houses increasing. Over the long term a house will appreciate in value, but over the short term that isn't always the case. Lets look at a hypothetical example of how someone might use a home equity loan as a consolidation mechanism.
Lets assume you buy a house for $125,000. Over the years you pay the mortgage down to $75,000 and the house appreciates to $150,000. Many banks will let you take the $75,000 in equity and borrow against it. So lets assume you take out a $75,000 home equity loan and use it to pay off your two cars and your credit cards.
Everything seems great, you have a lower payment and the bank gives you a good interest rate because you are just borrowing against the equity in your house.
Now lets assume that your area has a problem where several large employers go out of business or have massive layoffs. Your company is one of the ones that disappears. You find a job half way across the country that pays a little less than your previous job and put your house up for sale.
Unfortunately everyone else is putting their house up for sale as well and your house is now only worth $100,000. This isn't a big deal because you only owe $75,000 right? Wrong, you also took out that $75,000 home equity loan. So if you are able to sell the house for $100,000 you will still owe $50,000. So basically you can't sell your house until you can come up with $50,000. If you used the home equity loan to buy things that still have some value, you might be able to sell those things (cars, etc.) to help you get out of what you owe on your home, but chances are you consolidated debt that included consumer living expenses.
Debt consolidation using home equity is still a viable option and for many it is the cheapest easiest way to get rid of high interest loans. However, it is important to understand the risks involved and have a plan in place to handle a potential job loss that forces you to relocate.
So there is obviously good things about owning a home. One is that you can easily consolidate all of your debt into one easy monthly payment. There are many options for debt consolidation through the equity of your home, but most will have something to do with a 2nd mortgage that will be an additional and separate payment on top of your first mortgage on your house.
- Lenders:
Lenders from banks to ebanks and more, offer personal loans for the consolidation of debt. Banks and credit unions will typically require a very strong credit score and collateral, due to the markets of late, this is no surprise. Of course, again, the collateral will be the value of your home and as long as your credit score is decent this should not be an issue.
- The Benefits:
Obviously, the only other way to consolidate debt and eventually eliminate large amounts of debt would involve the acquisition of a sum of money equal to the debt. This could be done in many ways all of which are probably unlikely for most of us. This is why there are very real and practical reasons why the second mortgage, also known as an equity loan, might be the best bet for trimming down the debt and putting it all in one place. This makes it easy to make monthly payments and depending on the market, you could get a very good interest rate.
- The APR:
The interest rate is determined by the FED which keeps a close eye on the economy and makes its decision on the interest based on specific markers. The only thing you need to know is that this APR (annual percentage rate) is one of the main things you should be thinking of when deciding whether or not a 2nd mortgage is the answer to consolidating your debt. Keep in mind that you will also need to account for origination fees, mortgage insurance premiums, points, inspections, prepaid interest and other items required to obtain a mortage. This is not meant to overwhelm you, but these things must be considered when deciding to trim down your debt via a second mortgage.
- What Else?
For the most part, it is a very simple process these days when it comes to obtaining a second mortgage. The next thing to do is to research some of the more reputable 2nd mortage companies online and find out which have the best rates and make sure to ask a lot of questions so you are not surprised by a monthly payment that is above and beyond what you can resonably pay. Remember that this could be a very good way to lower your debt and consolidate all of your debt into one simple payment per month. This is why so many people decide that the equity on their home should be used for this purpose.
Both Mark Shead & Ben Needles are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Mark Shead has sinced written about articles on various topics from Debt Consolidation, Finances and Travel and Leisure. Please visit blog to find out more about. Mark Shead's top article generates over 18100 views. to your Favourites.
Ben Needles has sinced written about articles on various topics from Business Credit Cards, Anger Control and Business Credit Cards. About the Author (text)Seth Daugherty has a B.S. in Instructional Technology and is currently getting his masters degree inlibrary and information science. For more information on Using Your Home Equity for Debt Consolidation go. Ben Needles's top article generates over 550000 views. to your Favourites.