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Debt Consolidation Using a Home Equity Loan or HELOC
Published: 01/01/2011 by Ciele Edward
If credit card bills and other monthly financial obligations are piling up, a debt consolidation mortgage can help you get more organized by combining the debts you owe into one monthly payment. This makes it less likely that you’ll overlook a payment to one of your creditors and subsequently accrue additional fees. Depending on the interest rate you qualify for, debt consolidation can save you money by reducing the interest you’d otherwise pay on your debts over time.
How Debt Consolidation Loans Work
The majority of debt consolidation loans require you to take out a second mortgage on your home. Second mortgages provide you with the financial assistance you need by drawing on your home’s equity. If, for example, your home is worth $200,000 but you only owe your lender $150,000, you have up to $50,000 in equity that you can access for debt consolidation purposes. Unfortunately, the opposite is also true. If you lack home equity, you aren’t eligible for debt consolidation.
Home Equity Loans and HELOCS
Debt consolidation loans take two common forms: home equity loans and home equity lines of credit. Home equity loans are loans your lender extends to you based upon the amount of equity you have in your property. A home equity line of credit, often referred to as a “HELOC,” is a line of credit you draw from to make purchases or pay off your debts. You can use either a home equity loan or HELOC to consolidate your debts and pay off your other creditors.
The amount of money you can borrow will vary depending on your lender, your creditworthiness and the amount of debt you owe other creditors. Keep in mind as well that not every HELOC offers credit indefinitely. Some provide you with a set period of time over which you can withdraw money. Once this time period expires, you lender may grant you the option to renew your HELOC or continue making payments in installments. In some cases, however, your lender may demand payment in full.
Debt Consolidation and Foreclosure
While a debt consolidation loan may save you money, your home serves as collateral on the loan. Thus, if you fail to make regular payments on your home equity loan or line of credit, you risk losing your home to foreclosure. This is of particular significance if you plan to use your debt consolidation loan to consolidate credit card debt. Since most credit card debt is unsecured, your credit card company can’t seize your home if you stop making your minimum monthly payments. Consolidate your credit card debt with a debt consolidation mortgage, however, and your home may be in danger.
Although your primary mortgage lender may offer you a debt consolidation loan, you can and should shop around with other lenders to find the best interest rate and terms.
If you change your mind about your new debt consolidation mortgage, the Truth in Lending Act gives you three days to demand the return of any funds you paid toward the new loan before the loan goes into effect – even if you’ve already signed the paperwork.
