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Home equity loans offer several attractive benefits for debt consolidation. First, you are moving your debt from a host of different lenders to one lender with a lower interest rate. You will also be paying off one lump sum in a fixed time-frame, instead of paying various lenders various amounts on differing payment schedules. In addition, the interest on a home equity loan is tax deductible. Finally, in most cases, less money will be coming out of your bank account each month to pay off your debt.
In a recent article on Bankrate, Greg Pahl, co-author of “The Unofficial Guide to Beating Debt,” states, “A home equity loan can be an extremely useful strategy if it’s used properly, but people must have their eyes open and understand the implications.” You need to remember that your home is the collateral for the loan, so there is a great deal at stake. For this reason, many homeowners opt for a home equity loan versus a home equity line of credit when looking to consolidate debt. A home equity loan is a lump sum loan for a fixed period of time, while a line of credit works in the same way as a credit card or checking account, making it tempting to continue to borrow money against your home. A home equity loan is a more secure choice for many homeowners.
What about refinancing? When you refinance, you are replacing your existing mortgage, not just borrowing against the equity in your home. This means that you would pay interest on your credit card and other debt for the entire length of your mortgage. A home equity loan is typically a better option when debt consolidation is your goal.
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