Home Equity Consolidation
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The Average debt burden from credit and charge cards Americans carry is over eight thousand dollars according
recent surveys. The problem with this is that once someone starts carrying an account balance it can be very
difficult to achieve a $0 balance due to extremely high interest rates.
Coping with high amounts of consumer debt can be extremely difficult. Increasing monthly finance charges added to
the statement balance each month make it almost impossible to become debt free. One debt consolidation strategy
that can work well to get this problem under control is home equity consolidation.
Lowering Debts with Home Equity Consolidation
Home owners borrow against their equity for many
reasons. Higher education for their children, improvement projects for their home, vacations or investments. A home
equity loan can be used for just about anything but one of the best ways to use the proceeds of the loan is to
refinance high interest rate debt.
Benefits of a Home Equity Consolidation Loan
The tactic of getting free of credit card debt by applying for a home consolidation loan will not suddenly remove
the debt…it will refinance it with more favorable terms. It will allow consumer debt to get paid off with a lower
monthly debt payment obligation. Interest rate costs on statement balances tend to be high and are getting higher
every day. Also, credit card rates frequently fluctuate with the prime bank rate making it very difficult to devise
a long range budget designed to pay off statement balances. This problem is alleviated if the home equity
consolidation loan has fixed interest over the life of the loan.
Additionally, there can be a very quick improvement in cash flow each month because the new mortgage loan
payment will be smaller than the total of the combined payments of the credit card debt paid off. With only the one
much smaller mortgage payment freedom from debt in a few years is possible.
The Disadvantages of Home Equity Loans
Paying high interest debt with home equity consolidation
loans can be very helpful. On the other hand, it is critical to make use of any loan sensibly and borrow only an
amount that can easily be paid back. All new loans mean another monthly bill that has to be paid. Since the
proceeds of the loan will go to pay off the balance of credit card statements then stopping all credit purchases to
keep away from piling up more debt is key to success. Continuing to escalate total debt by not ending purchases on
credit will result in a grave financial crisis more serious than before the consolidation loan. This kind of
financial over-extension will cause home foreclosure because the new mortgage loan is collateralized whereas the
previous higher interest consumer debt was not.
There are other drawbacks to using a home equity loan for this purpose. Firstly, even though the interest rate is
reduced to a lower level than the refinanced consumer debt, the time period of the loan is at least three years,
sometimes many more. This is always a longer term than anyone who could pay off consumer debt without an
equity loan would carry a balance. What this means is that there will be several more payments with interest on
each payment and this will eventually add up to higher total interest costs than if the credit card and other
consumer debt was paid off within a few months rather than years.
If the Peices All Fit Together
This debt consolidation strategy should work well if the
monthly payment for the new equity loan fits within the budget, has a lower interest rate than the debt getting
paid off and will not siphon off too much equity. There should always be from ten to twenty percent home equity
left after all mortgage debt. It cannot be over emphasized how important it is to stop all credit purchases else
the debtor will end up with a mortgage debt consolidation loan payment in addition to more payments for new credit
card debt. This will cause worse problems than doing nothing.
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