Is a Home Equity Debt Consolidation Loan Your Best Bet?
A Credit Article Contributed by Mark Mcclelland
The Basic Facts about Home Equity Debt Consolidation Loans
You may not have thought about this before, but taking out a home equity secured loan to underwrite your debt consolidation and payoff plan might be a pretty smart thing to do.
This is because a lot of legal protections have been established to protect homeowners when they apply for such a loan. One of the best protections you have is the Federal Truth in Lending Act. This legislation requires lenders to tell you about the various terms and costs of the plan, the APR and payment terms, charges to open or use the account, and any variable-rate features, as well as give you a brochure describing the general features of home equity plans.
Because you're putting your home at risk when you establish a home equity line of credit, you have three days to cancel the transaction, for any reason, without charge, but to do so, you'll have to notify the lender in writing.
Once your line of credit is established, the lender may not terminate your plan, accelerate payment of your outstanding balance, or change the terms of your account, if you make your monthly payments as scheduled.
The Advantages of a Home Equity Debt Consolidation Loan
And using a home equity loan to finance you debt consolidation plan usually look pretty good when you run the numbers.
In the first place, home equity loans usually have fixed, low interest rates, so when you compare then to the sometimes-astronomical credit card interest rates, it's obvious you're going to save some money. In addition, since you secure home equity loans with your home, the interest charges you pay are often tax-deductible. And finally, your monthly home equity loan payment is likely to be a lot lower than the combined monthly payments of all the debts you paid off.
The Disadvantages to Taking out a Home Equity Debt Consolidation Loan
On the other hand, there are some disadvantages also, and not the least of which is that you're putting your home at risk if miss or default on your monthly payments. At least with unsecured credit card debt it makes no difference how deep in debt you go, or whether or not you're able to pay the credit card bills, as your creditors won't be able to foreclose on your house. But with a home equity line of credit, you're using your house as collateral, and if you default, the lender just might want their collateral - your house - back.
Some home equity loans have large one-time upfront fees, while others have closing costs, and some even have annual fees. These types of charges and fees can add a lot of cost to the loan and negatively impact the interest rate advantage these loans typically enjoy over credit card rates. In addition, if you sell your home, you'll probably be require to pay off your credit line before the sale can be completed.
Also, there is nothing that prevents you from sliding right back into you old spending habits as soon as your credit cards are paid off, and this is a real danger, especially if you don't close the credit card accounts when you pay them off. Then you'd have more credit card debts to pay off in addition to your obligation to pay off the home equity loan, as well as your mortgage.
If you want to ensure that you've learned your lesson concerning the lure of the credit card and take out a home equity loan to clean up the mess you've gotten yourself into, close out all the credit card accounts as you pay them off...you, and your house, will be glad you did.
