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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.
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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.
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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:
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