Christmas is over and a new year is about to begin. Like so many people, you’re probably thinking about making some important resolutions such as losing a few pounds, reading more books, perhaps taking control of your personal debt. Christmas shopping, medical bills, and credit card debt can add up putting more financial pressure on you then ever before. You’ve tried to cut back, but there is only so much meat on that bone!
Debt Consolidation Loans: Are They Right For You?
One way that consumers are getting a handle on their debt is through debt consolidation loans. By combining outstanding balances to just one monthly payment, hundreds of dollars in interest charges can be avoided and monthly payments lowered. Although a traditional debt management loan is one option, a home equity loan or home equity line of credit could be the better option for home owning consumers. Let’s examine how using your home’s equity can offer to you an appealing debt solution.
HEL or HELOC
A Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC) are types of loans where your house is used as collateral for your debt. With a HEL your loan amount, interest rate, and loan term are pre-set, while a HELOC allows you to draw on your equity credit line as needed during a specified “draw period”. Like a HEL, a HELOC must be paid back within a certain amount of time, but the consumer has the option of borrowing all the way up to the loan limit or nothing at all. With a HELOC you only pay interest if money is borrowed, but with a HEL your interest charges begin to accrue when you borrow the money.
Some points to keep in mind when considering tapping your home’s equity includes:
- The loan is lien on your home. If you fail to pay back your HEL or HELOC, then the lender has the right to go after your home. Usually, a home equity loan is the second loan on the home, after the mortgage loan, but sometimes it is the first loan. In either case, the lender reserves the right to foreclose on your home if you default on payments.
- Your interest rate is established based on your credit history, amount borrowed, repayment ability, current market rates and loan term. People with a better credit history are eligible for a lower rate, but your interest rate may fluctuate if you take out a variable rate loan.
- There may be fees involved with the closing of your loan. These can include a title search charge, origination fee, attorney costs, appraisal, and more. Your lender is required to disclose what your fees will be, if any. Some lenders will absorb all of your fees while others will give you the option to add these fees to your loan (costing your more money in the long run).
- You may be able to deduct a portion of your interest rate payments from your taxes. Please check with a lone advisor to see if you qualify.
Is a home equity loan the right debt management solution for you? That is something for you to carefully consider. Shop around for a loan, compare rates, and understand the terms of the loan before moving forward. Your home is on the line when it comes to a home equity loan, but the lower interest rates and manageable monthly payments are two attributes worth noting.
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