What is a Debt Consolidation Home Loan?

A debt consolidation home loan is a debt consolidation loan secured by your home, cottage, or other type of real estate. The typical person who gets a debt consolidation home loan would be someone who has unsecured debts, such as credit cards, but also has equity built up in their home.

What are the advantages of a debt consolidation home loan?

There are a number of advantages to a debt consolidation loan secured by your home.

First, if you live in the United States, the interest on a home loan or mortgage may be tax deductible, while the interest on normal consumer loans are not tax deductible. This tax break makes the cost of a mortgage even less than other types of non-tax deductible borrowing.

Second, the interest rate on a home loan is generally lower than any other type of loan, because the lender's risk is minimized by the value of the home. If you don't pay the loan, they can seize your house, so they are taking very little risk, and they can pass this saving on to you in the form of a lower interest rate.

The next advantage is that the term of the home loan can be up to 25 years or more, while a standard consumer loan seldom has a term of longer than five years. This extended repayment term lowers your monthly payments.

Finally, as with all debt consolidation loans, a home loan has only one payment per month, as compared to the multiple payments on your many debts before you consolidated.

What are the disadvantages of a debt consolidation home loan?

There are of course some obvious disadvantages to a home loan.

First, by getting this loan you are pledging even more of the value of your house, so if you sell your house before repaying the loan, your sale proceeds will be reduced by the amount outstanding on the loan.

Second, by getting a loan that you pay off over 25 years, you will be in debt for 25 years. For many people a more conventional type of borrowing is a preferable option, because it forces them to repay the loan in five years or less.

Finally, as with all types of debt consolidation loans, a home loan takes the immediate pressure off of the family finances. You now only have one debt payment to make, and your payments are lower than they were before. That may sound great, but it also means you now run the risk of getting back into debt trouble by overspending.

• Getting a larger home equity loan increases the borrowing power of the consumer and many simply slip back into their overspending habits and end up borrowing more than they can afford.

• Another bigger disadvantage of debt consolidation home equity loans is the risk of losing your home altogether.

There are many advantages to a debt consolidation home loan, but consider the pros and cons before making any decision.

More information is also available in our article on Debt Consolidation Mortgage Refinance, or by using our search box: