Do You Need A Debt Consolidation Home Equity Loan?

What kind of loan is a debt consolidation home equity loan? This is a loan that is a cross between two different loan programs that have been around for quite some time. The home equity loan borrows against the equity you have in your home. The debt consolidation loan rolls all your unsecured debt into one amount. When you are in need of a lower monthly payment and do not mind a longer payment term, this loan could be the one you need to get out of the spot you are in.

The first half of this hybrid combo loan is the consolidation loan. This is a type of loan that works to reduce your monthly payment for a certain amount of debt to a lower figure than you are currently paying. For example if you had a total of 9 loans including credit cards and a car loan. The total debt was $15,000 and the monthly payment was $500. You could consolidate this amount for 5 years and the payment would be $275. This lower figure is a result of the repayment term being longer.

The second half of our hybrid loan is against your home equity. With enough equity in your home, this kind of loan can be quite easy to secure. A creditor will be much more likely to approve an equity loan as he uses the equity in your home as collateral. If you owe $100,000 on your home and it appraises at $200,000, you have $100,000 in equity in that property.

Most loans on equity will be restricted by the lender to a certain amount. TO illustrate the effects of this, let's use a figure of 70% of value. In the example above, the home is worth $200,000 and the owner has $100,000 in equity. However, for the equity loan the lender will consider the value to be $140,000 (70% of $200,000) and making the amount of the loan max out at $40,000 ($140,000 - $100,000 mortgage outstanding). The $15,000 loan that we looked at above, on a 10 year home equity loan at current interest rates, would require repayments of $178 every month.

You will usually pay less per month on a consolidation loan but most often you will be paying over a longer period of time. If you are in great need to reduce your monthly outlay, this can be a great deal for you and it could save your credit rating too.

There are some downfalls to the consolidation in some instances. If you are in a financial spot and have been for a while, and have made more than a few late payments, you may have to pay a higher interest rate. In the worst case, you may not be able to get the loan at all. The real skill here is to see the trouble coming before it arrives and secure the loan before hand, not after you have been in a real bind for several months.

This type of loan can be a just what you need to help with your situation and could save much stress and hardship. Just know that by using the equity in your home for a consolidation loan, it will tie up a large chunk of the equity in your home for a long while. If the house values fall you may end up owing more than what your home would be appraised at.

Talk to a financial loan professional before you make any decision like this and just use good common sense when considering your options. If your financial situation isn't too bad, the best solution may be to do nothing.