Using a home equity loan as debt consolidation
Home equity loans can be used as debt consolidation by paying off your high interest rate credit cards, car loans, student loans, personal loans, and practically any debt you have. Your home equity loan will allow you to pay off these debts at a lower interest rate than you currently have. If you calculate the amount of interest you will pay over the life of the loan, you will probably pay more in interest fees, but it can really get you out of trouble right now. You will roll your debt into your mortgage, which is like expanding the debt payments over 10 years or longer. The more money you pay toward the principal, the faster you will pay off the debt.

A home equity loan helps you control your spending because you are able to consolidate all your debt into one low monthly payment. Instead of having multiple accounts open, you will have your mortgage plus a home equity loan, which is like having a second mortgage. Some banks will combine the home equity loan with your existing mortgage so you only have one low monthly payment.

Here are some ways a home equity loan can help:

• You will save thousands of dollars on interest alone. Usually a home equity loan has interest rates that are 7 to 10 percent lower from other loans and credit cards.


• The money you pay to interest is tax deductible. If you fall into a specific tax bracket, all or some of the money can be deducted from your taxes. Now, instead of just losing that money to interest you are actually going to gain some of it back. Before you sign up for a home equity loan, speak to a financial adviser about your situation and find out how much you will be able to deduct.


• Convenience is another great reason to consider a home equity loan as debt consolidation. Instead of trying to keep up with all of your different loan payments, you now have a single monthly payment. This will help you avoid late payments and collections if you start falling behind on your personal loan or credit card debt payments.

Home equity loan options
Lenders all have different payment terms for home equity loans. Depending upon your current debt situation and credit rating, you could qualify for a lower interest rate or higher loan amount. Most lenders will allow you borrow up to 75 percent of your home's equity, but you really need to avoid borrowing more money than you need. Here are some of the different home equity loan options for debt consolidation:

• Interest-only payments. If you have a lot of debt and you can't afford to pay high monthly payments, you may be able to use an interest-only payment method. An interest-only payment will be much lower, but you won't be decreasing your debt because your payments are not touching the principal amount. Be prepared for the payments to increase a couple years when the principal payment amounts will be due.


• Home equity loans help you spread your payments over a longer period of time, allowing you to have lower payments. If you need a smaller payment amount, consider a 10-30 year home equity loan. This will increase the amount of interest you pay over the life of the loan but it can help you get by on a month-to-month basis. Always try to pay more money to your loan each month so the money will start to impact the principal amount.


• You can choose payment options that suit your lifestyle. If you or your spouse does not work, you may need a lower payment plan. What really make a home equity loan nice is that you have a flexible payment option and you can accelerate or extend your payments according to your budget needs.

Home equity loan types
There are two main types of home equity loans. A home equity line of credit (HELOC) or a traditional home equity loan (HEL). When you apply for a home equity line of credit, your financial institution will advance you a specified amount of money up to the credit limit. You cannot go over your credit limit. It is similar to using a credit card because you will have a set limit and monthly payment amounts. The interest rate on a home equity line of credit is normally adjustable, which can be good and bad. Normally, you will only pay money toward the interest amount for the money you withdraw. Home equity loans can work for debt consolidation, but most people use them for home repairs or quick cash options.

A home equity loan is the best option for debt consolidation. A home equity loan is basically a second mortgage on your home. You will be given a lump sum of money to pay off your debts and you can use the extra cash to pay for other things. The loan will have a fixed interest rate and you will need to make monthly payments. Most people use home equity loans when they need access to a large amount of money at one time.

The downside of home equity loans
While a home equity loan can really bail you out of a bad situation, you need to be aware of the downside to a home equity loan. With a home equity loan, you can borrow a lot of money for a low-cost. The biggest problem you will face is yourself. You might get greedy because you have access to a large amount of money and you aren't thinking about the repercussions.

A home equity loan needs something to be put up as collateral and it is your home. This means, if you default on the loan, you can lose your home. Lenders will take ownership of your home and sell it to recoup the money they lent to you. This can be a big blow to you and your family and it can literally destroy your credit rating. It will be hard to get other lenders to take a chance on you if you lose your home to foreclosure.

If you opt for an adjustable rate mortgage, you could be nailed with higher monthly payments out of the blue. Since the interest rate is adjustable, it will fluctuate with the current market conditions. When the interest rates are low, you should start paying more money to your loan because more money will go to the principal.

You could end upside down in your mortgage if you borrow too much money. What usually happens to people is that they borrow 50 percent or more of their home's equity with the hope that they will pay it off and eventually sell their home for a profit. Since the equity is based off the current market conditions, your home could depreciate in value and you could wind up upside down in your mortgage. If you try to sell your home, you will lose money and you will be responsible for paying off the amount you owe in a single lump sum.

A home equity loan is a great option for debt consolidation and for quick cash, but you need to be careful. Always do your research and know what you are getting into before you sign the paperwork. Think about your future and if you will be able to afford the monthly payments. Take your salary into consideration and decide if you will have a job that is able to support the monthly payments before you apply for a home equity loan.