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Debt Consolidation Home Equity Loans - Advantages And Disadvantages

Written by: Carrie Reeder

Getting a home equity loan, or second mortgage, for the sole intent of consolidating and ultimately eliminating unnecessary debts is a great plan. Many consumers are burdened with high credit card balances, consumer loans, etc. Reducing or paying off debts takes time. Furthermore, many do not have the disposable income to lessen credit card balances.

Owning a home places you at a huge advantage. Those who have built equity in their homes may acquire a home equity loan as a way to reduce debts. These loans are affordable, and serve a useful purpose. However, debt consolidation home equity loans have certain risks.

How Do Debt Consolidation Home Equity Loans Work?

The concept of debt consolidation home equity loans is simple. Home equity loans are approved based on your home's equity. A home's equity can be calculated by subtracting the amount owed from the home's market value. Hence, if you owe $50,000 on a home worth $120,000, the equity totals $70,000.

Once the lending institution approves your loan request, and the money received, the funds are used to payoff creditors. Creditors may include high interest credit card balances, consumer loans, automobile loans, student loans, etc. Furthermore, debt consolidation can used to payoff past due utility bills and medical bills.

Debt consolidation loans are not free money. These loans have to be repaid within a reasonable timeframe. On average, home equity loans have short terms of seven, ten, or fifteen years - sometimes less. Because home equity loans have fixed and lower rates, these loans are easier to payoff than credit cards.

Pros and Cons of Debt Consolidation Home Equity Loans

The major advantage of home equity loans is the ability to become debt free. However, home equity loans involve careful planning. Once credit cards and other loan balances are eliminated, closing credit accounts is a smart maneuver. This way, you avoid accumulating additional debts.

Sadly, some consumers repeat past credit mistakes. Along with paying a home equity loan, they acquire more credit card debt, which increasing their debts and payments. Excessive debt makes it difficult or impossible to maintain regular home equity loan payments. This will present another home equity loan danger - inability to repay the loan. A huge disadvantage of debt consolidation home equity loans involves the risk of losing your home. Before accepting a loan, realistically analyze whether you can afford a second mortgage.

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