Understanding The Advantages Of Home Equity Loans For Debt Consolidation
Once all your mortgage payments have been done, you realize that your home’s value has gone up phenomenally over the last 15 years or so. Now you have easy access to a lot of cash as you could use an effective home equity loan for consolidating your existing debts. This sounds really amazing if you are in need of some cash for paying off your outstanding debts. However, give it careful thought before taking the final plunge.
A home equity loan is often called a second mortgage and this would be allowing you to actually borrow some money for huge expenses or for consolidating your existing debts by leveraging the equity available in your house. Your home equity would be based primarily on the exact difference between the current balance on specifically your mortgage and the assessed value of your house.
We understand that you could access home equity loan as an effective refinancing tool and that is possibly a logical and easy way but it has its own risks and dangers. You may end up losing your home suppose you are not able to make the monthly payments. Once you start defaulting, there is every possibility that your home would be confiscated. Think twice before putting your precious asset, your home in line for such risks.
HELOC or Home Equity Loans for Debt Consolidation
As per https://www.forbes.com, “A home equity line of credit (HELOC) is a revolving line of credit secured by the equity in your home. That line of credit can be used for whatever you like, such as paying off high-interest debt. Like a credit card, you can borrow against it, pay it off, and then borrow again.”
Even though home equity loans and HELOCs utilize the actual value of your house as collateral, they would be operating differently. HELOCs are supposed to be credit lines, implying you could be using as much as you wish of a pre-approved loan, whenever you want.
Home equity loans seem to be used interchangeably often with HELOCs. While both these loans would be offering flexibility in the kind of costs it can actually cover, in the case of a HELOC, there is an approval of maximum loan amount. You are required to withdraw whatever you need. It is quite similar to your credit card. Moreover, a HELOC has variable interest rates that imply that your monthly payments would be increasing or decreasing in case, the rate index actually increases or decreases.
The amount that you could actually borrow would be determined according to a number of important factors such as your credit score, your income, and the amount of equity your home is supposed to have. It is up to the lender to examine your creditworthiness and assess the real estate local market for determining the size of the credit line to be offered to you and at precisely what rate of interest. Now, this amount could be quite less as compared to your home equity. Lenders generally, want you to actually maintain minimum 20 percent equity in your home.
In this context, we know that a home equity loan usually is supposed to be a lump-sum loan that is known as a second mortgage. Lenders would not only be interested in knowing how much equity is there in your home and also, your capacity to repay this loan but also, they wish to know exactly how you are intending to use the money.
As per experts utilizing your home equity loan specifically, for your credit card debts would be working for some people, however, it could culminate in a total disaster particularly for people who have issues in managing consumer debt effectively. The greatest potential issue is that you are converting a consumer debt that does not necessitate collateral into specifically a home loan which would be requiring collateral or security. Read the fine print carefully. Browse through reliable and reputed sites such as https://www.nationaldebtreliefprograms.com/ to learn more about perfect debt relief solutions.
Advantages of Home Equity Loan
Tax Deductions
Your loan may be eligible for some tax deductions. According to the IRS, the interest accrued on home equity loans will be deductible if the loan is used to build, buy outright, or substantially improve the home used to secure the loan. The deductible interest amounts to a maximum of $750k for married couples, $375k for married taxpayers who file separate returns. For any other purpose, say, student loan debt or credit card payoffs, the interest is not deductible. To understand this better, speak to a financial consultant or tax professional, or have a look at the IRS’s website.
Fixed Interest Rate
It is common for home equity loans to carry a fixed rate that is lower than that of other unsecured consumer loans and credit cards. This can bring some simplicity and stability, especially in an environment in which rates always change for other kinds of loans. The surety that your rates will not fluctuate over the lifetime of the loan is definitely comforting.
Lump Sum Payoffs
In this mode, the entire amount that you are supposed to borrow is handed to you in a single payment, a lump sum. This allows you to cover large expenses up front. You will be able to make regular monthly payments towards the principal and accrued interest for the previously agreed-upon term to pay it off, but you must remember that you have to pay off the entire loan if you sell your house.
Conclusion: Is Home Equity the Right Option for Me?
If you seem to be a responsible borrower having a reliable, consistent, and stable income, home equity loan could be a wonderful option simply because it provides immense flexibility in what expenses it could actually cover, particularly with relatively larger expenses. Home equity loans would be using your home as the collateral. If you start missing necessary payments, the lender has the right to file for foreclosure on your home. Even when you are going through a personal emergency which makes it almost impossible to come up with the necessary payments on time, you could be losing your home. It is important to remember that paying off your existing multiple debts using HELOC or home equity would not in any way change the spending issues that triggered your debt problems and resulted in overwhelming debts. If you carry on misusing credit cards, be sure to encounter fresh new debts on top of the necessary home equity loan repayments.