Consolidating debt is a broad term for describing the act of turning multiple unsecured debts — like credit card balances and medical bills — into a single payment. Taking out a loan is one common method of consolidation. However, there are a few different ways to go about borrowing money to streamline other debts.
One strategy involves using the equity in your home. However, there are some definite advantages as well as disadvantages to this approach. Here’s what this process entails, as well as some of the major pros and cons to consider when it comes to home equity debt consolidation.
What Is Home Equity Debt Consolidation?
Homeowners with equity in their properties can apply that amount to their outstanding debts, like credit card balances for example. That way, instead of dealing with numerous high-interest debts each month, borrowers can make that mortgage payment in installments until it’s paid in full.
Like every debt elimination option out there, consolidating via a home equity loan has both pros and cons to consider carefully before taking the next steps.
Consolidating Debt with Home Equity: Pros
Let’s start with some of the potential advantages of consolidating debts using home equity.
Which of these options sounds like less of a headache?
Staying on top of multiple unsecured debts each month — each with its own interest rate, minimum amount due and due date — or making a single payment on a second mortgage? If you’re like most people, you’d choose the latter hands down. So, one big draw for this strategy is its ability to simplify the process of paying bills.
A bigger potential perk of home equity consolidation is low interest rates. Where credit cards can carry annual percentage rates (APRs) at or above 15 percent, home equity loans tend to remain in the single digits — often averaging just north of 5 percent — as they’re secured by the asset of your home. Repaying debts at a lower interest rate can save you money, based primarily upon your credit rating and the length of the loan. While it does typically take five, 10 or even 15 years to repay a home equity loan, the monthly payments tend to be lower than credit card payments and the like.
One more thing, the interest you pay on a home equity loan might be tax deductible; while interest paid on credit cards is not.
Consolidating Debt with Home Equity: Cons
This secured nature of home equity loans is something of a double-edged sword, particularly when compared to seeking online debt consolidation assistance from a firm like www.bills.com. Your home acts as collateral against the loan so you get lower interest rates and comparatively easier qualifying. However you also risk foreclosure on your property if you miss payments. Meanwhile, missing credit card payments will damage your credit score, but will not result in the forfeiture of your residence.
Another factor to consider is it can take a long time to repay home equity loans — often upwards of 10-15 years. This means it’s worth considering how quickly you could get out of debt making strategic payments across your credit cards. The payment term may be much shorter keeping things the way they are.
Another con is your home equity may act as a band-aid solution if you’re unable to curb the spending habits that caused you to amass debt in the first place. Avoid letting consolidation lull you into a false sense of being “debt free.” It’s very important to avoid accumulating new debt on your credit cards in the aftermath.
Finally, getting a home equity loan usually entails closing costs and appraisal fees you have to factor in when you’re doing the math to see if this strategy will help you get ahead. The more you know about the pros and cons of consolidating using home equity, the more capable you are of choosing the most advantageous strategy for your needs.