Home Equity

Advantages and Disadvantages of Debt Consolidation Home Equity Loans

Consumers who have equity in their houses and would like to consolidate all their loans into one larger house loan can use the equity in their house as collateral to secure a larger home loan. This is one of the most popular ways to consolidate debt.

The amount of this loan is calculated as a percentage of current value of equity. Equity is determined by deducting current loans from market value. While these loans have a lower interest rate they do add to the borrowing power of consumers and may lead to increased overall debt load over time. Debt consolidation is helpful when expensive signature loans are a problem to service as it gives the house owners a new start in managing their finances. Debt consolidation service combines the first loan of the house as well as the equity loan and gives the homeowners a new schedule of payment since they have to make just one payment instead of several separate ones.

Debt consolidation loans secured by equity are generally considered safer and therefore provide lower payment terms which may be tax deductible. Some of these loans have balloon payments requiring them to be continuously refinanced or paid off.

Advantages

The main advantages of debt consolidation of home equity loans is as mentioned below:

• Interest rates on home loans may be tax deductible while consumer loans are not. This further lowers debt service by providing tax incentives.

• Interest rate on the consolidated loan is fixed while most other loans float with prevailing market rates.

• Home loans are longer term than most consumer debt; when payments are spread over several years the overall debt service payment is lower.

• Consolidated loans are easier to service as there is only one payment to make rather than several.

• Home equity loans require a lower credit score threshold as they are secured by real estate and this makes them easier to get.

Disadvantages

Even though debt consolidation using home equity is a boon for people who are having trouble with their consumer loans, there is a flipside to this potential benefit as well. There are several disadvantages which should be considered.

• 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.

The debt consolidation for home equity loans should be taken up only after full estimates of the repayment amount and time required for paying it off is within your limits.