A Home Owner Has Three Options When Considering Debt Consolidation
If you need to consolidate your debts and you own a home, consider yourself lucky. If you are able to take a home equity loan, you may have a low cost option for debt consolidation.
There are three types of loans for consideration:
Second Mortgage
A second mortgage is when you borrow an additional amount, creating a second mortgage on the home that you already carry a mortgage loan (first mortgage). The second mortgage is just that, it is second to the first mortgage. Second mortgages are riskier for the lenders, therefore the second mortgage are usually shorter terms and slightly higher interest rates.You will find the lending institution that carries the first
mortgage more eager, than a new lender, to write the second. If you default
on your loans the first mortgage will prevail over the second, therefore if
you have a new lender for the second mortgage, his risk are pretty high.
The benefit, you can use second mortgages to pay off
your higher interest, shorter term loans which will consolidate your loans
into a lower monthly payment. Even though interest rates are usually higher
on a second mortgage, chances are they are lower than the credit cards and
miscellaneous personal loans.
Home Equity Line of Credit
A Home Equity Line of Credit is also called a HELOC; this is a revolving type of loan. With this type of loan you are borrowing against your home's equity.With a HELOC, you don't receive a lump sum upon refinancing. You receive a credit line up to a stated limit. You can borrow on this credit line for any reason up to the stated maximum limit. A HELOC usually has a lower interest rate than a standard home equity loan.
Refinance With Home Equity
This may also be referred to as a Home Equity Loan, which by itself is also known a second mortgage.If you use the additional equity in your home to refinance your first mortgage and write it for a larger amount, then use the extra amount to pay off your credit cards and personal loans.
For example: Your home is worth $400,000 and you owe $250,000 on the first mortgage, this gives you $150,000 in home equity.
Now let's say you add up all your other credit cards, personal loan, car loan, medical bills etc... They total $75,000. You would have your lender write you a new first mortgage for $325,000. Use the $75,000 to pay off your other debts and you now have one payment over a longer period of time which will lower your monthly payment and interest rates.
This type of refinancing will give you the lowest interest rates and may be tax deductible.
These usually cost more to process. These require new appraisals and surveys as compared to the above two options, which may not require the appraisal and survey depending on the amount you are wanting to borrow.
Conclusion
Although the above loan options are a low cost, low interest method to consolidate your debt, you must remember, they all use your home equity as collateral. So be careful, you must not use these methods, unless you are absolutely positive you have the ability and discipline to pay them back or you will be risking your home to pay off a credit card!!!!!
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