You may be curious about a consumer debt consolidation loan as you seek to better manage your debt.
As you investigate your options, you'll quickly discover the home equity loan, also commonly known as a 2nd Mortgage. There are two ways you can use the equity in your home (i.e. your 1st mortgage minus the real value of your property) to help consolidate your debts.
"Probably the very best thing my earnings
have given me - is absense of worry.
I have not forgotten what it feels like to worry
whether you'll have enough to pay the bills.
Not to have to think about that any more
is the biggest luxury in the world.”
- J.K. Rowling |
The first way involves a standard home equity loan - this is the most popular method for consumer debt consolidation. With a traditional home equity loan, you cannot borrow beyond the equity of your home. You benefit from having a predictable fixed rate, as well as a lower payment since the term is usually extended to a 10 or 15 year term.
There is also a home equity line of credit (HELOC) option you may not know about. Essentially, you can use your equity as a revolving creditline, with a variable rate, that essentially operates much like a credit card. This is why financial advisers discourage people from using a line of credit for consumer debt consolidation, as it can simply serve to increase their debt, rather than diminish it.
The HELOC product may, however, have a fixed rate option. You would need to clarify this with the specific lender you are dealing with.
To be sure, the adjustable rate and flexible terms of a home equity loan or line of credit make it very attractive to people who want lower their payments and minimize their risk of fees and interest. And luckily, there is a way to use a home equity line of credit in a similar fashion as you would use a safer home equity loan.
These days, many lines of credit products offer the choice of a fixed interest rate for either a portion of the line, or even the entire amount. What you must be wary about, however, is that as you pay off principle on the fixed portion, the same amount is once again available for your future use as a revolving line of credit. This can easily encourage many to begin to use the line portion and once again rack up new debt.
This is why a home equity line of credit should really be the last resort for consumer debt consolidation. Only if other debt consolidation loans, for example a home equity loan, are not possible, should you choose any sort of line of credit.
Considering that the home you live in is the secured debt behind your loan, you don't want to flirt with becoming more indebted and at risk of being delinquent, and possibly losing your home.
However, if you do find that a home equity line of credit will help you crawl out of debt, just make sure to choose a fixed interest rate that you can budget for and try to keep the term of the loan as short as possible.
As you pay off your consolidation loan, close the account immediately. You want to live debt free from this point on!
Don't forget, in order to make consumer debt consolidation a successful option, you must address your spending behavior up front, stick to a reasonable budget and create a plan for savings and wealth building.
"There is no comparison between that which is lost by not succeeding,
and that which is lost by not trying."
- Francis Bacon |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
