Consolidating Debt with a Home Equity Loan

If you're a homeowner who is experiencing difficulty paying your credit card payments, you may be wondering if a home equity loan is right for you. You. ll need to know some basic information about these loans to make a good decision.

Basically, when you get a home equity loan, you. re using your home as collateral. The equity of your home is the amount that you actually own. You can use that amount as security against the amount that you. re borrowing.

To figure out how much equity you have in your home, you simply subtract the amount you owe on your mortgage from the value of the house.

For example, if your home is worth $180,000 and your mortgage is $160,000, your equity will be $20,000. That is the amount of security you. ll have and the amount you. ll be able to borrow.

A home equity loan has some advantages. You. ll probably get a lower interest rate than if you had a personal loan. Because your home is security, you. re considered a low risk to your lender.

You. ll also be able to get a tax deduction for any interest that you pay on a loan of up to $100,000. There is no other loan that will provide these kinds of tax benefits.

There are, however, some disadvantages to this type of loan. Just as you paid closing costs to purchase your home, there are similar costs involved in taking out a home equity loan.

By taking a home equity loan, you also decrease the amount of ownership you have in your home.

Finally, and probably the most serious disadvantage, is that you are running the risk of losing your home. Inability to make payments on your home equity loan may result in foreclosure.

Many people pay off their credit card debt using cash from a home equity loan only to max out their line of credit again. In this case, they find themselves unable to keep up with paying back both the home equity loan and their new credit card debt.

Home equity loans can be a good choice if you have a plan to repay your loan and keep yourself out of further debt.

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About the author:

Michael Torrance is a financial consultant with First American Debt Consolidation and Loans, a company specializing in debt consolidation loan  alternatives through consumer credit counseling.