Home Equity

Benefits of Debt Consolidation from a Secure Home Equity Loan

Debt consolidation loans mean that instead of paying a number of companies a monthly payment each month you will only have to pay one company. While there are quite a few pros and cons for debt consolidation loans, many people choose to take out a second mortgage or home equity loan to pay their bills down or completely off.

"The principle of a consolidation loan is simple," spells out the site Lendingtree.com. "You can take out a new loan at a lower rate than your existing debts, which may carry higher rates often charged by credit card companies and retailers." Since the new loan has a lower interest rate overall the new payment should be lower than the combined total of your old monthly payments.

At lycos.com the site warns that "Obtaining a debt consolidation loan is dependent on your credit rating. If your credit rating is not all it should be, it may prove difficult to get one of the cheaper consolidation loans. Even so, you may still save money." The Lending Tree mentions using a home equity line of credit to consolidate outstanding loans. "Since the loan is secured by the equity you have in your home, the lender is able to give you a lower interest rate. Lenders will typically loan you an amount equal to 80 percent of your equity, although some will lend up to 125 percent."

One thing to keep in mind when using an equity line of credit is that if you don't repay the debt your home could also be in jeopardy. Also be sure that if you secure a debt consolidation loan through an equity line of credit you immediately pay off the bills in question since you will be given an account that enables you to write checks against the credit line established by this style of financing. As a general rule you will also only pay interest on the principal balance and in some cases the credit line is tax deductible.