Home Equity Debt Consolidation Loan – The Basics
If you already own your own property, you may wish to consider a more specialist debt consolidation option commonly referred to as home equity debt consolidation loan. The theory of a home equity loan is that the debt is consolidated and secured against your property, either by means of a new mortgage or an extension to an existing mortgage.
For those who have sufficient equity in their current property, this type of loan may be seen as highly beneficial. By using your property as security for the debt consolidation loan, it is likely that a better rate of interest can be obtained than with a traditional debt consolidation loan. If the debt consolidation is being added to the current mortgage, the rate is likely to be the same as for the current mortgage, which is almost invariably favourable when compared to any standalone, unsecured loan.
Mortgages can often be repaid over a long period of time, in some cases up to 30 years. This means that the actual monthly payments can be reduced considerably, but the payments will continue for longer. In practice, this means that, by the end of the term, the total amount repaid may be much larger than if the individual smaller loans had been paid, when necessary. In some cases, however, when the monthly payments are simply unmanageable, spreading them over a longer period of time may offer the ideal solution.
Potential Problems with Home Equity Loans
Home equity debt consolidation is only cheaper because it is secured against a property. This in itself can pose considerable risks to a borrower. If the monthly payments are not made, there is a risk that the property may be repossessed by the lender in order to satisfy the loans.
In order to use a home equity debt consolidation loan, there has to be sufficient equity available in the property. For example, if you wish to consolidate £20,000 worth of loans and you property is worth £200,000 with an outstanding mortgage of £190,000 you will not be able to do so. In fact, many mortgage companies only allow the total mortgage to be around 80 to 90 percent of the value of the property.
It is also worth bearing in mind that if the mortgage is for a large percentage of the property price and the housing market drops, you may find yourself in financial difficulties and unable to sell the property for the full value of the mortgage. If there is a shortfall, you will have to make up this shortfall, possibly with a further considerable loan.
Home equity debt consolidation allows debts to be consolidated to form part of a current mortgage or an entirely new mortgage;
interest rates are generally lower and payment terms longer, allowing reduced monthly bills;
but, if the loan is defaulted on, the property could be repossessed.