You might be considering tapping your home equity to pay your debt off or to consolidate your credit card mortgage. Well, this is an excellent solution to lower interest rates, but you may have to face multiple drawbacks of this process. Borrowers who several lenders and mortgages surround usually decide to consolidate their debts in order to transfer high-interest debt to a collected loan with lower interest rates. Although choosing this option could be cost-effective, this way could be full of risks. However, before consolidating your mortgage, you must be aware of its benefits and what downsides you can face during the process.
Advantages of Home Equity Loans
If you are thinking of tapping your home equity with the HELOC, make sure to glimpse its benefits that you would get in with this method which is discussed in detail.
✦ Loan Limits are High
If your debt amount is more enormous and you are trying to consolidate, it may become hard to convince your lender to approve or transfer all of your loans into a single debt with a low-interest rate. However, the good thing about a home equity loan is that the amount you get as debt with 85% of the cost on your home other than anything you still owe on your mortgage. If you have accumulated loads of equity, then you can use a piece of it to pay all your debt off and still have the space to lend some money again.
✦ Monthly Payments would be Lesser
When you are handling multiple mortgages and lenders’ multiple installments every month, you are more likely to lose your right track and manage numerous things simultaneously. Notwithstanding, if you eventually pay something late, you would need to pay an amount of fee. The chances are that your credit might suffer heavy losses. Thus, while consolidating your home equity loan, you get only one debt left which you have to manage with fewer monthly installments.
✦ Interest Rates Are Lower
Typically, this is the main reason people decide to consolidate their mortgages because they are fed up with wasting thousands of dollars every year on interest rates. Home equity loans generally contain much lower interest rates that are fixed and occur with a fixed repayment period which aids you to sustain the minimum amount you keep spending on interests. The interest you pay on home equity debt is often tax-deductible because it is crucially similar to acquiring a second loan on your home.
Pitfalls of Home Equity Loans
Although you may pick the home equity option by considering its plus points only, you must not ignore some downsides that you would encounter during this process.
✦ Your Home is at Risk
Some unsafe loans, such as credit card debts, are not bound to any particular security. Yet, if you don’t pay, there is a great chance that you could result in getting charged. However, once you get seized, no one would be there to come and help you get your personal property. With a home equity loan, you would be back by your property, and if you are unable to make payments, there is a probability of losing your home. If your income suffers and you don’t have any savings to cover the gap, you could discover yourself losing your home, and the bank would decide to exclude you from your house.
✦ Home Equity Doesn’t Always Help
Many people misunderstand that a HELOC definitely helps them in getting rid of multiple debts, but it is not a specific solution. When the mortgage is formed because of something unexpected, such as severe illness or job loss, using a home equity loan could be the best solution at this time. However, if you owe thousands of dollars on your credit card because of your expenses, then the home equity loan doesn’t help you solve this problem.
A home equity loan is a beneficial tool for debt consolidation and provides plentiful profits to you. However, it doesn’t always become the right choice because, along with benefits, it offers several drawbacks as well. That’s why it is essential to take a look at everything about home equity loans and debt consolidation to reduce maximum risks.