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As your biggest financial asset, it’s easy to be tempted by the idea of using your home equity to help improve your financial situation. The most common form of this is taking out a home equity line of credit as a secured debt consolidation loan. This allows you to consolidate multiple unsecured debts, such as your credit cards, into one monthly payment. While there are distinct advantages to taking out a home equity loan, there are also a number of risks, too.
Before you take out a home equity loan, learn about the risks involved and other alternatives for debt consolidation. Call us at to speak with a certified housing or credit counselor who can provide information on your options for debt consolidation, as well as helping you weigh the risks involved with a home equity line of credit.
A home equity line of credit lets you consolidate multiple unsecured debts like credit cards into one monthly payment that’s typically lower than what you pay on all the debts separately. It can do this because the interest rate you get on your home equity loan is often much lower than any of your high interest credit cards. As a result, you pay less each month and often pay off your total debt faster than you would if you left your debts unconsolidated. In some cases, a home equity loan is even tax-deducible. There are risks you should be aware of however, which are outlined below.
Home equity loans are not your only option, however, when it comes to debt consolidation. A personal debt consolidation loan is more or less the same, except it doesn’t use your home as collateral on the debt—making it an unsecured personal debt consolidation loan. As an unsecured loan it will typically have a higher interest rate than a home equity line of credit, but it does not risk your home in the process of paying your debts.
The main risk with a home equity line of credit is that your home is being put up as collateral against you repaying the debt. You miss a few payments, your account lapses into delinquency, and suddenly you lose your house in the process of trying to fix your debt problems. Even if you think you have the money to cover the bills and your income is steady; a lost job, sudden accident, or even reduced hours at work can suddenly put you in a real bind.
Another risk comes with the contract of the loan, itself. As contracts go, a home equity loan can be extremely complex and difficult to understand. There are various requirements and fees associated with the transfer of your credit card balances to the loan, and interest rates can fluctuate widely depending on the loan you select. In some cases, you may also pay a yearly maintenance fee and/or pay transaction fees every time you draw on the line of credit.
In addition, a home equity loan has many fees and costs associated with it that you don’t see in a standard personal loan. The charges are similar to what you see in buying a home, including property assessment fees, closing costs, title searches and insurance, mortgage preparation and filing, and taxes. Make sure to read all documentation carefully and ask as many questions as needed to make sure you understand the terms of your loan before you sign anything.
Qualifying for a home equity line of credit is much like qualifying for any other line of credit. The lender will look at your credit history and credit rating, to ensure you are responsible and pay your bills on time. Unlike a personal loan, however, they will also look at the equity in your home to determine if you have enough equity to qualify. In general, lenders typically look for you to have about 20% equity in your home—meaning your home’s fair market value is worth at least 20% more than the amount owed on your home.
Home equity loans are not the only type of debt consolidation you can do to provide relief from your credit card debts. As mentioned above, you can take out an unsecured personal debt consolidation loan that may have a slightly higher interest rate, but won’t risk your home in the process. In addition a debt management plan can consolidate your debt without risking your home as well. If you’re in debt and need to find solutions, give us a call at to discuss your financial situation and review your options.
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