Home equity debt consolidation refers to the process of using the value of your home to borrow to repay other debts. It is also referred to as mortgage debt consolidation.
In many cities across the country over the last few years the value of residential real estate has increased. If you have owned your home for a few years, it is probably worth more today than what you paid for it originally.
The increase in value is due in part to the increased real estate market, but also due to renovations or upgrades you may have made to your house.
In addition, because you have made mortgage payments for the last few years, your home equity has increased. You home equity is the difference between the value of your home and the amount owing on your mortgage.
Why would I want to use my home equity to get a debt consolidation loan?
Everyone believes it's a good idea to pay down your mortgage. We all hope to retire someday with a house that's fully paid for, so paying down your mortgage is a good idea.
If paying down a mortgage makes sense, why would you want to use the home equity you have built up to increase your mortgage with a debt consolidation loan?
The answer is simple: lower interest rates and lower monthly payments.
If you are considering a credit card debt consolidation loan, a home equity debt consolidation loan might be your best option. If you are paying 18% interest on your credit cards, but you could get a home equity debt consolidation loan for 8% interest, it's easy to see that more of your monthly payments would be going towards the principal, and less to interest, which pays your loan off faster.
There are two types of home equity debt consolidation loan.
The first type would be a brand new mortgage, often referred to as a refinance debt consolidation loan. If you owe $120,000 on your mortgage, and owe $30,000 on your credit cards, you might qualify for a new $150,000 mortgage. This new home equity debt consolidation loan mortgage takes the place of your existing mortgage, and allows you to repay your credit cards at the same time. Your interest rate is lower, and you only have one monthly payment, so you are financially better off.
The other type of home equity debt consolidation loan is a second mortgage, or a line of credit secured by your mortgage. Continuing our previous example, you would leave your $120,000 mortgage in place, and just borrow an additional $30,000 as a second mortgage or line of credit secured by your house. The interest rate is still lower than credit card interest rates, so you have reduced monthly payments.
A home equity debt consolidation loan isn't for everyone. You must own a home with some home equity, and you must have the income to service the debt. However, if you qualify, it may be a wise financial decision. Feel free to search for more information: