Home Equity Loans

Debt Consolidation

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One of the most popular options for home owners today is using home equity loans to consolidate their debt. Getting into debt is easy, but getting out is hard. You look around and realize that you've piled up a significant amount of credit card debt, but you have no idea how it happened. The scenario plays out the same way for most. A few purchases here and there, a large purchase once, a few late payment fees, and other charges. The credit card provider slaps a bunch of interest on top and you have a bad situation. Home equity loans can be used to lessen the burden, though.

Isn't it dangerous to tap into my home equity?

If you are experienced financially, then you know that home equity is valuable. It's something that you've built over time and you shouldn't give it up for just any reason. Most people would advise you to only take out one of these loans to do home improvements. After all, this is just adding value to your home both for your own pleasure and for the future sale of the property. You'll get the money back in all likelihood. But taking out a loan to pay off credit card companies is an entirely different kettle of fish. It requires more caution and more pause on your part.

This isn't "additional" debt

One of the things you need to consider is the fact that taking out a home equity loan to consolidate debt is not an additional debt burden. It's a simple restructuring of your current debt. After all, you're going to have to pay the creditors in some fashion. When you think of it in these terms, you will realize that it's not quite as dangerous as you may have thought. Sure, the new loan is tied to your home and thus has more consequences if you default, but it shouldn't be viewed as new money borrowed. You're just moving around your current debt to a new creditor, and there can be plenty of advantages to a move of that nature.

Why do people use home equity loans to consolidate debt?

First and foremost, many people do it for quick relief. When credit card debt begins to build and you're a little bit behind, it can be frustrating. The calls keep coming in, but you don't have any way to make them stop at that moment. Home equity loans give you the money to get those creditors off of your back. Instead of being burdened by them in the future, you are able to pay off the debts in full and take a fresh start. The nice thing about this kind of restructuring to consolidate debt is that you will get organized. You'll no longer have four or five people to pay off with different due dates and payment amounts. Instead, you will have one central creditor and one payment plan. You'll know exactly when the debt is due to come off of your books, and you'll see the progress made on that debt. This can make it much easier to keep up and stay motivated to pay down your debts. It will also take a significant burden off of your shoulders each month.

The flip side of this is that you will save money that might have been lost on late fees, over the limit fees, and the like. When you are disorganized in your approach to paying down credit cards, the fees can really add up. This money is lost and it could have been spent paying down the principal of the loan. With only one loan to pay off, you won't have to worry too much about the sunk cost of credit card fees.

A lower interest rate on the loan

Most people will recommend that you consolidate debt in order to get a lower interest rate. Chances are that if you have missed a couple of payments on your credit card, you are paying a rate above 15%. This can make it almost impossible to make progress. A home equity loan, on the other hand, might come at closer to 5%, depending upon the amount, the bank, and your credit score. This means that more of your money goes to paying off the loan, so you can make progress on it more quickly. Likewise, you will protect your good credit history by avoiding missed and late payments on those cards.

Why are people using home equity loans to consolidate debt? Mostly because it makes a lot of sense. The lower costs, higher degree of organization, and central creditor are things to consider. Though it does come with some risk, it is one worth taking for many folks who find themselves digging out of a hole.

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