For people with a great deal of unsecured debt and a fair amount of equity (assessed value in excess of the debt amount) built up in their house, home equity debt consolidation is an attractive proposition. However, for some this process results in getting even farther behind. Those who cannot have an empty credit card without filling it up will not benefit from a debt roll-over.
Interest on home loans, whether on first or second mortgages (which is what an equity loan technically is), is tax-deductible. Interest on consumer debt, such as credit cards and store charge accounts, is not. This means that part of the interest paid on mortgages is recaptured in tax write-offs.
The rate of interest on a mortgage is generally much lower than on unsecured debt, as well, and the prepayment time is longer. This means a lower monthly payment which will cover many smaller bills.
Your house is probably your largest asset and the one that produces the most stability for you and your family. Taking out a second mortgage on this asset increases the danger of losing it to foreclosure or in bankruptcy. This concern used to be fairly remote when the job market was strong and the stock market a good place to invest, but today many people have been faced with the reality of losing their home when they cannot keep up the payments.
This is a step that only makes sense if two things are established. First, the amount of unsecured debt should be quite high. There will be fees to pay, as in any refinancing, and this increase in the total debt must be small compared to the benefits that will result from the transaction.
Secondly, it will be useless to roll over the debt only to fill the credit cards up again and find that the position is worse than ever. Not only will a poor money manager still have too many bills to pay, the individual now has more debt and more to lose. The only truly effective course is to cut up all the cards and close all the charge accounts that contributed to the problem and focus on paying off all personal debt entirely.
With a comprehensive budget and a sincere desire to get rid of obligations, you may find a roll-over of consumer debt to be good policy. With a lower monthly payment that is more principal than interest (and you can pay extra if necessary to make it so), you will make fast progress toward your goal of being debt-free. Moreover, if you do miss a payment or make it late, you have only one late fee and one mark against your credit.
With self-discipline and a focus on getting rid of obligations, home equity debt consolidation is good strategy for a debt-free future.
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