Currently, the loan rates for refinancing a mortgage or taking out a home equity loan range in the area of 6.5 percent to 7.8 percent. While these rates are higher than just a year or two ago, they are still considerably lower than interest rates on credit cards and other consumer debt vehicles. Property values in most areas have risen substantially over the last several years, providing many homeowners with good equity, which they can now effectively use to take out a debt consolidation loan that will save them money every month.
A debt consolidation loan that is drawn again home equity is considered by many financial experts to be a shrewd and wise financial move on the part of homeowners. It allows the homeowner to transfer their high interest credit card debts, automobile loans, and other consumer loans to a much lower interest rate because the new loan will carry a much lower interest rate.
Homeowners can tap into the equity in their home by using one of three primary vehicles for an equity-secured debt consolidation loan. The can use their equity to get an equity line of credit, they can choose to take out a home equity loan, or they can simply refinance their existing mortgage. Each approach to borrowing against the equity has various benefits and considerations of which to be aware.
Some homeowners think that the simplest approach to doing a such a loan is to simply do a full refinance mortgage. In this scenario, they would borrow enough to cover the pay-off of their existing mortgage plus all of their other consumer debts.
The advantage of this approach is that it makes managing finances very simple, as all the debt payments would be reduced to one monthly mortgage payment. However, if interest rates on home mortgages have increased and are higher than the original mortgage, then this would not be the best approach.
If the existing mortgage loan rate is very attractive, then taking out a home equity one, or a second mortgage, would be a good way to handle the debt consolidation loan that is desired. The proceeds from the second mortgage home equity loan would be used to pay off other consumer debts and the multiple debt payments would be transformed into the one payment.
The third option is to apply for a home equity line of credit (HELOC) which provides the flexibility and convenience of drawing on the equity in the home. Once a HELOC is established, the homeowner can use the available funds at any time to pay off other debts, to finance vacations, college expenses, or anything else they choose, up to the limit of the available credit that is established based on the amount of home equity.
These loans combine the convenience of a revolving credit account with the low interest rates of home equity loans and can be a good way to manage debts and also be prepared for emergency expenses that every homeowner encounters from time to time. Most lenders provide the homeowners with debit cards and convenience checks to access their home equity line of credit.
Another reason financial experts point to in recommending doing a debt consolidation loan that is secured by equity in your home, is that the interest on equity loans is tax deductible, while the interest on other types of consumer debts is not. The deducibility does depend on how you handle the filing of your taxes, so you should consult a tax professional about this process.
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