If your monthly payments are taking up a significant part of your monthly budget or if debt collectors are continually knocking on your door, you can opt to consolidate your bills. You can choose to take out a personal consolidation loan, transfer your credit card debt to a credit card with lower interest rates, or if you own your home, take out a home equity loan. This type of loan could be cost-effective in the long term, but it comes with certain risks. If you’re considering a home equity loan, below are the advantages and disadvantages when going this route.
The Advantages of a Home Equity Loan
- You will have fewer payments to pay off monthly. When you are struggling to repay multiple payments to various creditors every month, it’s effortless to keep track of deadlines. But consolidating your debt using a home equity loan will make it easier for you to keep track of the due date since it’s the only payment you need to pay off every month.
- You will save a significant sum on interest rates. A home equity loan has a lower interest rate and comes with a predetermined repayment period that will ensure that the amount you pay on interest is kept to a minimum. Also, any interest you pay towards the interest is typically tax-deductible because it’s basically like taking out a second home loan on your house in Ogden.
- You’ll get a higher loan limit. Another advantage of home equity loans is that you can borrow more money. Depending on your lender, you might be permitted to borrow up to 85% of your home’s value, not counting anything that you might still owe on your home loan. If you have accrued a significant amount of equity in your home, you can then utilize a portion of it for repaying your debts and have some left over should you need to borrow again in the future.
The Disadvantages of a Home Equity Loan
- There’s a chance you could lose your home. Because you’re your home equity loan is guaranteed by your property, if you’re unable to pay it off, you could lose your house. If you don’t have sufficient savings for covering the gap, say you fell ill and lose your job, your lender might foreclose, and you would need to find somewhere else to live.
- It won’t necessarily resolve the issue of debt. If you have accumulated debt due to something unexpected such as a major illness or job loss, leveraging your home equity to keep creditors in check might be the most suitable choice for you. But if you have thousands of dollars of debt, say in your credit card, because you’re addicted to shopping or don’t know how to budget, then using your home equity isn’t a solution for your debt problem.
A home equity loan could be a valuable tool to consolidate debt, but it isn’t always the best option. Before touching your home equity, keep the above information in mind and figure out ways to reduce the potential risks.