Consolidation With Home Equity Loans and Second Mortgages

Home equity loans and a second mortgages use the equity in your home as collateral. A typical home equity loan provides a "line of credit" and only when funds are drawn from it do interest charges accrue and payments begins. By contrast, a second mortgage provides the borrower with a "lump sum" of money. Interest is charged on the entire amount borrowed and monthly payments begin immediately. Both types of loans typically include processing fees and an appraisal fee, among other costs.

In many cases, the annual percentage rate (APR) (or interest rate) of such loans may be reasonable, or even really good. When looking for one of these loans, however, it is best to factor in all of the costs of getting the loan. Often, the final result could be that you end up with a better interest rate than the current average interest rate of the debts you intend to pay off. On the other hand, the cost of processing the loan and resulting monthly payments might not provide you with any relief at all.

I'd Love A Home Equity Loan - But Can I Get One?

The problem most debtors have is not having enough equity in the first place. Lenders use a formula to determine eligibility and the amount they will lend. This is usually based on a percentage - from 50% to 80% of the current market value of the home, less the amount that is still owed on it.

So as an example, if the current market value of your home is appraised at $100,000, lenders will typically lend $50,000 to $80,000, that is, if you own your home fully. If, however, you still owe $75,000 and the lender you found offers a 80% loan-to-value ratio, you may get a $5,000.00 loan. Then, you must remember you have to pay the processing fee and other costs before you actually the amount.

The Advantages

The advantage of a second mortgage or a home equity loan is that the interest is tax deductible. As part of determining the total cost of the loan, this is a factor that should be included. Discussing this with an accountant is often an excellent idea.

The Risks Can Be High

Your circumstances definitely come into play when considering a home equity loan, and the amount of your home that you actually own is key. There are many risks and concerns that must be considered, though, as these loans are secured, and share the same risks and dangers as debt consolidation loans (read about Debt Consolidation Loans here).

In particular, should you default on either kind of loan, you could end up losing your home. If you are applying for this type of loan simply to consolidate unsecured debt (which includes medical bills, personal loans and credit card bills), it is critical that you know the risks.

If You Have To Do It, Be Safe

If you are hell bent on getting a home equity loan, the better option may be to just borrow enough to consolidate your secured debt (such as your mortgage or car loan), and perhaps certain unsecured accounts that have risk of legal action. This would lower the monthly payment and reduce the risk of defaulting on the loan. That way, if you run short of funds one month, you can simply take from the funds you have budgeted to pay your unsecured accounts. After all, putting your unsecured debt in jeopardy is far less dangerous than putting your home in danger. And far less permanent, as well.

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