Debt Consolidation for Home Owners
Homeowners often use their home equity to obtain a much-needed debt consolidation loan. Representing the average home owner's largest asset, refinancing a home with a cash-out option, or taking on a second mortgage, are two practical ways to access cash for debt consolidation purposes. With many borrowers struggling to make minimum payments on credit cards and losing the battle, a home consolidation loan can save a family's financial future; preventing bankruptcy, garnished wages and other negative financial repercussions.
Refinancing with a Cash-Out Option
Refinancing the current home loan to obtain cash out of the equity, is one practical way to come up with a lump sum of cash to pay off bills. This solution will not work for all homeowners. This alternative can be an attractive option if there is enough equity in the house, and the new financing is acceptable based on the net overall effect of the debt consolidation.
The single biggest challenge homeowners might face when pursuing this option is with the home appraisal. To qualify for a cash-out loan, the home must appraise for a set amount, as determined by the bank. Usual bank standards require at least twenty percent equity in the home before allowing a customer to take cash out of their equity. That figure may vary between lenders.
Another factor to consider prior to applying to refinance a home is the closing costs. Closing costs can range from a few hundred dollars to a few thousand dollars. Borrowers should factor in the costs of the loan when deciding whether to proceed. For many borrowers, the steep closing costs will not greatly impact their decision to continue with the loan, given the financial relief provided by the debt reduction. But it is still important to compare lenders and loans, to factor the closing costs into their decision about which lender or loan to pursue.
Home Equity Loans
A home equity loan is another option for a borrower to consider. There are two types of home equity loans to consider, a home equity line of credit and a second mortgage. Each loan represents a good alternative to certain borrowers, depending on their particular situation. As always, a borrower should shop around to find the best terms on a home equity loan. Most lenders will allow borrowers to take the paperwork with them, so they can study the terms without feeling rushed at the closing table.
A home equity line of credit is similar to a credit card. A borrower signs over their home as collateral for a line of credit that they can use as cash for debt consolidation. Borrowers are given a specific credit amount to draw from. The monthly payment changes as they take more of the cash. As the cash is paid back by the borrower, the balance owed decreases and is available again to be used by the borrower as desired.
A second mortgage is a loan paid out in one lump sum. This loan is secured with the borrower's house used as collateral. The loan is paid off with set monthly payments.
For more information about debt consolidation for home-owners, please check-out the following pages:
