One of the financial opportunities that homeowners enjoy is the ability to tap into their property’s equity for funds. For most homeowners, the most popular and beneficial use of such equity cash-outs is for a debt consolidation. Homeowners seeking to consolidate debt normally have four basic mortgage instruments available:
1. Home Equity Loan
2. 125% LTV Second Mortgage
3. Home Equity Line of Credit (HELOC)
4. Refinance
Non-homeowners can sometimes still obtain debt consolidation loans, but these loans are often for low amounts and much higher interest rates. This is unavoidable, for the simple reason that these debt consolidation loans are unsecured.
Pros & Cons
In most cases, using the property’s available equity to consolidate can be a wise choice. But this is not a blanket advantage.
Using your property’s equity for debt consolidation is ideal for debts with high interest rates and long repayment periods. For example, most personal and unsecured loans charge interest rates in excess of 20.00%. Also, with the exception of low teaser rates, most credit cards charge interest rates of 16.00% to 23.00%.
A debt consolidation loan can cut in half the interest rates the borrower is paying on those debts. Moreover, mortgage interest rates are often tax-deductible.
However, debt consolidation loans are not always the best choice for debts with relatively low interest rates, such as student loans and car loans. A debt consolidation loan can still be advantageous for borrowers who need to lower their overall monthly debt payments. Some borrowers may consider the idea of lengthening the life of a debt to be a horrendous plan. However, it depends on the overall cost of the loan. Although you will be paying off the loan for a longer period, you will actually be paying the debt with less money.
To clarify, remember that your future dollars will probably be worth much less than your current funds. For example, a 1998 dollar is worth only a fraction of what the dollar was worth in 1968. Apply that to a 10-year or 15-year debt consolidation loan, and you see that it can actually pay to stretch out your payments.