Home equity loan vs line of credit
What exactly is a home equity loan? This is a kind of hybrid between two types of loans, both the old debt consolidation loan and the famous home equity loan. If you are considering consolidating your credit card, car loan, and other unsecured debts into a single lower payment, all of them combined, this may be the loan for you.
First, I would like to talk about the loan that we are talking about. A debt consolidation loan, by itself, works like this. Suppose you have 8 credit card bills, an auto loan, and 2 small loans signed at a small lender. The total balance is $ 14,500 in debt. Her current payment is $ 426 each month. A debt consolidation loan will turn all these loans into one and extend the duration of the payment to 5 years. At current rates, the new payment will be $ 246 per month.
Second, we will discuss the home equity loan. As it sounds, this is a loan against the equity in your home. If you have enough equity in your home, this type of loan can be easy to obtain since the creditor will use the home as collateral for the loan. If you owe $ 145,000 on your home and the value is estimated at $ 235,000, there is $ 90,000 in equity.
However, most equity loans are only allowed up to 70% of value. Using the same figures, this makes the value of your home in regards to the bank for the loan, $ 165,000. Then you could get a loan of $ 20,000. This loan would be for a term of 5 to 20 years and could considerably reduce your monthly expense. The same $ 14,500 borrowed on a ten-year debt consolidation home equity loan would have repayments of $ 152 each month.
With debt consolidation you will pay less, but generally for a longer period of time. If you desperately need lower payments to survive, it can be good business and save your credit rating.
One of the pitfalls of debt consolidation loan are credit rating problems. If you have already had difficulties before applying for the loan, this can make you pay a much higher interest rate. In some cases, you may not be able to qualify for the loan. The trick is to apply for the loan if you see problems coming, not after you’ve been in personal financial difficulties for months.
A debt consolidation loan can be a good thing and it will save you many difficulties and heartaches. However, you should be aware that the debt consolidation loan that uses the equity in your home as collateral can continue to take a large chunk of equity for a long time. If the value of the home falls, you could get into debt for more than your home is worth.
Just use good judgment and think wisely before using your home equity to consolidate debt. Always seek the advice of a financial professional to help you make a smart loan decision.
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