There is no argument that credit card debt is expensive right now. Not only do they generally come with higher interest rates, but the recent hikes resulted in card rates climbing even higher. Therefore, if you are carrying a balance on the credit card, chances are you are subjected to paying a hefty charge on the interest.
Whether it is your credit card loan or any other existing loan, using home equity for loan consolidation is one of many unique choices that the consumer has. These generally come with low interest rates. I personally think they are way better than credit cards. And if you are considering paying all your high-interest loans, it can be a great option for you.
In this blog, I will tell you the risks and rewards of using home equity as loan consolidation.
[1] What is debt consolidation?
Debt consolidation is all about combining various outstanding debts, such as personal loans, credit cards, and others, into one single loan or a line of credit. Why do it? Well, the procedure simplified your debt management by merging various due dates and the sum into one monthly payment, generally at a lower interest rate. The objective of this is to make repayments easier and more effortless and allow you to be debt-free.
[2] Advantages of home equity as loan consolidation
I have mentioned some of the biggest advantages of equity home loan consolidation below:
- Lower rate of interest
A home equity loan usually comes with a lower rate of interest than other kinds of loans, as your home serves as the collateral for the loan. In case you have an outstanding debt on your personal loan or student loan, consolidating with a home equity loan can make it easier for you to pay them off. Additionally, you don’t have to be worried about fluctuating rates of interest as the rate is always fixed.
- One streamlined payment
When you consolidate your debt by utilizing home equity, you may simplify your life. Instead of paying one credit card bill on a specific date and your personal loan on another date, you will need to make one payment each month on a specific day. As on-time payments are a vital part of the credit score, it can assist in eliminating the potential for missing payments because of calendar confusion.
- Lower monthly payments
Utilizing a home equity loan for loan consolidation will usually lessen the monthly payments as you will have a lesser rate of interest and a longer loan term. If you have a tight budget, the sum you save every month can be exactly what you need to get out of debt.
[3] Risks of home equity as loan consolidation
Now that I have told you its advantages let’s take a look at some of its risks:
- Closing costs and fees
Like your mortgage, home equity loans often have associated charges. It might concern the origination fees, appraisal charges, and associated expenses. However, you should know that not all of these loans may carry the same additional charges.
- Risk of foreclosure
Since your home is the collateral for this loan, in case you fail with the repayment terms, the lenders might go ahead and initiate foreclosure proceedings. It is a serious consideration that if you cannot pay your loan back, your house might be lost.
Wrapping Up
With that, I finish today’s blog. Just like any other financial means, this, too, comes with a set of pros and cons. Make sure you do deep research on the debt consolidation loan you are trying to consider and understand if it is the best fit for you.
