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Debt Consolidation Home Equity Loans - Advantages And Disadvantages

Carrie Reeder

Getting a home equity loan, or second mortgage, for the sole

intent of consolidating and ultimately eliminating unnecessary

debts is a great plan. Many consumers are burdened with high

credit card balances, consumer loans, etc. Reducing or paying

off debts takes time. Furthermore, many do not have the

disposable income to lessen credit card balances.

Owning a home places you at a huge advantage. Those who have

built equity in their homes may acquire a home equity loan as a

way to reduce debts. These loans are affordable, and serve a

useful purpose. However, debt consolidation home equity loans

have certain risks.

How Do Debt Consolidation Home Equity Loans Work?

The concept of debt consolidation home equity loans is simple.

Home equity loans are approved based on your home's equity. A

home's equity can be calculated by subtracting the amount owed

from the home's market value. Hence, if you owe $50,000 on a

home worth $120,000, the equity totals $70,000.

Once the lending institution approves your loan request, and the

money received, the funds are used to payoff creditors.

Creditors may include high interest credit card balances,

consumer loans, automobile loans, student loans, etc.

Furthermore, debt consolidation can used to payoff past due

utility bills and medical bills.

Debt consolidation loans are not free money. These loans have to

be repaid within a reasonable timeframe. On average, home equity

loans have short terms of seven, ten, or fifteen years -

sometimes less. Because home equity loans have fixed and lower

rates, these loans are easier to payoff than credit cards.

Pros and Cons of Debt Consolidation Home Equity Loans

The major advantage of home equity loans is the ability to

become debt free. However, home equity loans involve careful

planning. Once credit cards and other loan balances are

eliminated, closing credit accounts is a smart maneuver. This

way, you avoid accumulating additional debts.

Sadly, some consumers repeat past credit mistakes. Along with

paying a home equity loan, they acquire more credit card debt,

which increasing their debts and payments. Excessive debt makes

it difficult or impossible to maintain regular home equity loan

payments. This will present another home equity loan danger -

inability to repay the loan. A huge disadvantage of debt

consolidation home equity loans involves the risk of losing your

home. Before accepting a loan, realistically analyze whether you

can afford a second mortgage.

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