It’s almost impossible to turn on the radio or television without seeing an advertisement for home equity loans (sometimes called second mortgages or home equity lines of credit). These companies promise to consolidate your credit card debts and other debts into a single low monthly payment. These offers sound tempting; after all, who doesn’t want to lower their payments each month?
The truth is that home equity loans can be helpful in cutting some peoples monthly bills, but they are not for everyone. To know whether a home equity loan is a good choice for you and your family, it’s important to understand the pros and cons of using the equity in your home for debt payment.
The biggest reason why many people use home equity loans to pay off debt is because they can result in a lower monthly payment. This is due to two major factors First, provided that your credit score is in good shape, home equity loans typically offer lower interest rates than many credit cards, so you end up owing less interest each month on your outstanding balance. Second, lending companies usually allow you to stretch out your payments over a longer period of time. While credit card companies usually want their money faster, lending companies often allow you to payoff debt over 15 or even 20 years By stretching out your payments over many years, you can lower your monthly payment considerably.
Another way that home equity loans save money in the short term is through a tax savings on the interest you pay throughout the year. Just like any home mortgage, when you pay interest on a home equity loan, that interest becomes a tax deduction that can result in a substantial savings. Interest paid on credit cards is not tax deductible. Finally, many people seek out home equity loans because they help to simplify the bill-paying process. If you are paying several credit card bills each month, it can be difficult to keep track of the different invoices and due dates, which can result in late or missed payments. For those who find that they are losing bills or accidentally missing payments, it can be helpful to have all of their debt consolidated into one simple payment.
As wonderful as these positives are, however, a home equity loan may not be the right choice for anyone who is uncertain about their future income or who may not be able to make the monthly payment on a home equity loan. Just like a regular mortgage, a home equity loan is secured by your house and surrounding property. If you missa payment, the lending company can foreclose on the loan. This means that they could set in motion a legal process that could result in your losing your home. Therefore, if you are not certain that you can make each monthly payment on time, it’s best not to consolidate your debt byway of a home equity loan. After all, credit card companies can ruin your credit if you miss a payment, but barring some really strange circumstances they won’t take away your home.