The ever increasing cost of living, higher prices on all of our necessities such as food and gas, is making it difficult for many people to keep their head above water financially. Everyone is trying to make necessary adjustments and adjusting their spending habits but sometimes it is just not enough. You still come up short. Debt consolidation has become the solution for many, and some homeowners have decided to take advantage of the equity in their home and obtain a home equity loan to consolidate their debt. All loans have their risks and benefits. A home equity loan is not the exception, but also carries a unique risk.
It is true that by consolidating with a home equity loan you can save a lot of money each month. Rather than having several payments you are reduced to one payment a month and generally at a much lower interest rate. Lending institutions flood people with propaganda advertising these advantages as the solution to all your financial problems.
One thing that the lenders fail to emphasize in their advertisements is that these home equity loans are secured by your house so by taking these loans you are putting your home on the line.
That means that you could be taking debt that at present is not secured by any assets, such as credit card debts or medical bills, and tying them into your home. Since this puts your home at risk this is a very serious decision that should be considered carefully.
A wise consumer considers things beyond what the lending institutions tell them. It is to your benefit to think about what could happen. For example, let’s consider what could happen if you are able to only pay off a portion of your debt with a home equity loan.
With credit card bills, medical bills, or other expenses, it can be difficult to pay and may have a higher interest rate. If you default on the payments it can have a negative affect on your credit. However, it does not put you at risk of loosing your home.
A home equity loan does not eliminate debt. It still has to be paid, just in a different form. There could still be months when your budget is tight and it could be difficult to make those payments. Now your home is at risk.
Consolidating your debt with a home equity loan can be very helpful. However, since a home equity loan involves putting a valuable asset, your home, at risk it should be considered very carefully.
By: W. M. Blake
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If you’ve been making regular payments on your mortgage, you’ll find that in addition to repaying your loan you’ve also been building up the equity in your home… and if you want, you can use this equity as a means to secure a loan for a variety of different purposes. A low interest home equity loan can be just the thing to pay for home improvements, debt consolidation, vacation planning, or most other expenses that you can think of. If you’re interested in applying for a low interest home equity loan but aren’t sure how to ensure that you’ll get the best interest rate that you’re eligible for, consider the following.
How Equity Works
Though it’s a popular subject in loan advertisements, many people aren’t sure exactly what equity is or how a low interest home equity loan actually works. Equity is actually a measure of how much money you’ve paid toward your outstanding mortgage, and is calculated as the value of your house minus the amount remaining on your mortgage. This gives you a representative figure of how much you’ve paid toward your house, or how much of it you actually “own”. This feature of equity figures largely into how it is used for a low interest home equity loan.
Equity as Collateral
When you apply for a low interest home equity loan, the lender is going to calculate the equity that you have and compare it to the amount that you wish to borrow. Equity works well as collateral, since it can be easily figured and it is very easy for lenders to process it. An equity loan gives the new lender a claim on your house, which would be settled after the mortgage is cleared should either lender be forced to take possession and place the house on the market to reclaim their money. Though this creates more risk than some individuals would prefer, using equity as collateral opens people of all credit ratings up to interest rates that they might not have been eligible for otherwise.
Lowering Interest Rates
Since equity is generally higher in value than many forms of collateral, lenders are much more likely to offer you a lower interest rate than they might with collateral of a lower value. This means that instead of having to settle for the interest rates that you’re used to getting, you might be able to get a rate much closer to those that individuals with excellent credit receive. If you have a low interest home equity loan, you might also find that loan payments are more manageable due to the lower amount that’s added on to each payment from the accrued interest.
Equity Loans and Bad Credit
A low interest home equity loan can be very beneficial to individuals with poor or bad credit, since it allows them to get a loan when many other lenders wouldn’t be willing to offer one as well as opening up interest rates that they probably haven’t been able to get in a while. Additionally, by making on-time payments to the lender these individuals can actually begin improving their credit score without trying. The payments are reported to the credit bureaus as being on time and in full, and these positive reports gradually begin to outweigh the negative reports that have dragged their credit down in the first place. As the negative reports begin to expire after 5 to 7 years, the positive reports will then begin to have an even larger influence.
By: Paul Rogers