The Consumer Debt Trap
A recent survey determined the average American family has consumer debt balances of over $10,000. Once a debtor gets into the position of carrying credit card balances over from month to month it becomes very difficult to pay the balance down to zero because of high interest finance charges and carrying fees.
Utilizing Home Equity Consolidation to Lower Debts
There are many uses of a home equity loan. Many home owners borrow against their equity for home improvements, college tuition, even vacations. The loan money can be used for virtually anything. One of the best uses for the loan is to pay off high interest credit card and other consumer debt.
Benefits of an Equity Debt Consolidation Loan
One strategy for getting credit card debt paid off is applying for a real estate equity consolidation loan. This approach will not miraculously remove debt however the loan will allow the debt to be paid off with lower monthly debt payments. Credit card interest rates charged on unpaid balances are high and getting higher. Additionally, these rates most often fluctuate with the prime bank rate making it impossible to work out a longer range budget to pay the balance off. Once consolidated into a home equity loan the payment and interest rate can be fixed. Also, there will be an immediate positive impact on monthly cash flow as the one new equity loan payment will be lower than the combined payments of the debt paid off. With only one debt payment one can plan to be debt free in a few years.
The Disadvantages of Home Equity Loans
Home equity consolidation can be very useful. However, it is always important to use loans prudently and borrow only what can comfortably be paid back. All loans create another monthly bill to pay. If the funds are used to pay off credit card balances then discontinuing credit purchases to avoid piling up more debt is mandatory. Increasing total debt by not curtailing charges on credit will create a deeper and more serious financial crisis. If a home equity loan used for debt consolidation results in financial over-extension then the consequences could very well end up in foreclosure because now the debt is collateralized whereas consumer debt is not.
Also, there are other disadvantages one should be aware of. First of all, although the interest rate charges are lower than the debt paid off with the loan, the term of the loan is generally for years – much longer than someone who could pay off consumer debt without a loan would carry a balance. This means there will be many more debt payments with interest on each payment adding up to more total interest than if the debtor just “tightened the belt” and paid off their consumer and card debt within months rather than years.
So if the new home equity consolidation loan monthly payment is within the budget, has lower interest rate finance charges and still does not leverage the home more than 80% accounting for all mortgage debt, this debt consolidation strategy can be a good way to refinance high interest credit card and consumer debt.
By: Mason Smith
Posts Tagged Credit Card Debt
Home Equity Consolidation
Sep 10
Home Equity Refinance
Aug 13
There are various situations that arise when you need a quick loan without any hassles. For instance you may need some money to pay off your credit card debt or you may want cash to do a remodeling of your house. It is at these times home equity refinance is very helpful. It can provide you the much-needed money immediately without any problem. In traditional refinancing, there are umpteen numbers of applications forms that have to be filled and a wide variety of procedures and formalities. However, when you refinance via home equity, you can avoid all these tensions and hassles.
What are the closing costs for home equity refinance?
Zero. The best part about these loans is that there are no closing costs for them. Some financial institutions charge a small amount for processing the loan. But still this amount is meager and negligible when you compare it with the other loans.
Should you go in for private mortgage insurance?
No. Never opt for a private mortgage insurance as neither this is useful nor will this fit into your budget. If you borrow more than 80% of the value of your house as a loan, you are due to pay private mortgage insurance. But, you can avoid this payment if you go in for a home equity loan. Under this loan, you can borrow even up to 100 percent of the equity that you possess.
What are the ranges of interest rates for home equity refinance?
The interest rate of home equity loans is quite low. Thus, most people are not very surprised about getting a great deal. The reason for the low interest rates is the intense competition among the lenders. Shop around the market and get quotes from various lenders. Though local financial intentions are the best people to help you with home equity loans, certain huge national lending companies can also be of immense help and support to you. Read the agreement carefully, understand all the implications and then, take up the loan.
By: Sara Fredder
Applications for home equity loans and second mortgages recently hit a 15 year high. According to Freddie Mac, “88% of homeowners who refinance their homes in the 1st quarter got a mortgage at least 5% larger than their first loan.” Since this was the largest increase since 1990, and the Fed continues to increase key interest rates, it is my contention that the demand for cash and the ability to finance quickly is the greatest it has been since World War II.
“The reality is that some people still believe the interest rate are under 6%,”said John Allen from Laguna Beach, California. John continued, “If I need cash for home improvements..Why wouldn’t I just take out home equity loan since my first mortgage rate is under 5%.” John’s mentality mirrors many of my borrowers’ frames of mind of late. Consumers are much more educated than they used to be about financing and taking out second mortgages. First time homebuyers don’t hesitate to get subordinate financing to help them accomplish their goals. Some people like John just want to finance the construction for pool and spa, but most of my borrowers are focused on consolidating credit card debt so they can cut their expenses and have access to more money at the end of the month.
Some interesting home equity products have rolled out recently. Companies like BD Nationwide Mortgage and Ditech are offering larger 125% loans, and convertible equity credit lines. They are called convertible, because they start out as variable rate credit lines, but at any point you can convert portions of the line to a fixed rate loan, and still keep the unused portions of the line of credit open for revolving credit. These hybrid home equity loans are changing the face of second mortgage products and they offer powerful features that meet the needs of a typical family as well as the savvy real estate investor.
By: Lynda Nelms