If you want to put your property in the line for consolidating your loans then you should either do it properly or not do it at all. There are lots of complicacies and legalities involved in the process that you should know and follow. This will keep you on the safe side as well as protect your property from being repossessed by the banks and lenders who have the legal right to do so, provided you fail to make the payments.
To do it safely, you will need to maintain extreme caution while refinancing your multiple and probably the high cost debts with a low cost mortgage borrowing. There are lots of ways to get such refinance and an equal number of factors to consider and points to remember right from the initial to the final stages.
Points to remember
To begin with, you must know that there is no escaping from debt in any case. No matter whatever option you choose to repay your debt you will always have to pay it back just as the loan agreement wants you to. Typically, a debt consolidation loan will only help you to manage your manage your debt by making it more repayable and will not eliminate it even by an iota.
- Next, you should go through the debt consolidation reviews before you opt for it and even consult with a debt advisor for that matter for further clarification and confidence to go ahead with it.
- You must also know that use your home equity is a very bad idea unless you follow a highly disciplined life and strictly follow your stance not to acquire any further debt due to financial mismanagement or impulsive buying.
Assuming that you have this confidence in you and have opted for a home equity to help you consolidate debt, there are three specific ways in which you can do this. These ways are:
- Taking on a cash out refinance
- Opting for a fixed rate second mortgage or
- Obtaining a Home Equity Line Of Credit or HELOC.
All these three options have its significant pros and cons and therefore it is required that you evaluate all your options before you make any decision. If you can do it properly, then you will get all your debts under control as your monthly costs will fall significantly. Depending on your equity you can even pay off all your accounts such as credit card balances, student loans and car loans.
Features of home equity
Of late home equity is up nationwide. This may be due to the new rate or any other but according to the Federal Reserve reports it is found that the homeowners at the end of the second quarter have amassed a huge real estate equity worth to the tune of $13.9 trillion. This figure is much higher than it used to be and it is due to the primary reason that the values of homes in almost all areas are on the rise.
Another report of the National Association of Realtors published in October showed that the nationwide home prices that are existing now has risen year after year and it was the 68th straight month in October last year.
Apart from gaining a large amount in equity, the homeowners now have an easy access to the money as well. Reports suggest that the mortgage rates now is around 4% which is much lower than the cost of financing student loans or car loans, and especially credit cards.
Making the right choice
The present economic scene sets the perfect stage for taking on a debt consolidation mortgage that has all sorts of advantages in it. However, whether you will choose a home equity loan or cash out refinance will depend on several other factors and few of these may even surprise you.
- The rate difference in interest is the first and most obvious concern just as the pitfalls involved. Assuming that you are repaying a 4% mortgage and a 16% credit card, you will surely want a lower rate which is a sensible but not the only consideration.
- You will have to take the total interest cost into account as well considering the tenure on the loan on which the monthly payment is calculated. Longer the repayment time, lower will be the monthly total cost of interest.
- Next up, you should consider the structure of the loan you wish to take so that it is entirely to your advantage.
- The maximum amount that you can borrow and effectively repay within time will also matter into taking the right decision. This will also depend on several other factors such as the worth of your property, the outstanding loan balance, the loan to value ratio and lots more.
Most people feel that cash out refinance is the best way to consolidate their multiple debts. However, it is also important that you consider other alternatives such as a line of credit or a fixed second mortgage that are equally good and effective.
While cash out refinancing is best if you can improve significantly on the terms of the current mortgage a fixed second mortgage may also be a good choice as you pay fees on the cash used.
Lastly and most importantly, since the fact that you still have to pay off the loans in full even after consolidating it makes desperate people think about the most drastic debt consolidation mortgage alternative. This is mortgage with a Chapter 13 bankruptcy.
This is an ideal option for those consumers who cannot pay off the debt from any given or available sources even by refinancing their home but still have a lot to repay on their non-mortgage debts.
However, this is not an easy option and will need you to create a budget, cut your expenses, dig up your heels and choose the smallest debt to pay that one off. This way you can eliminate a monthly payment. Repeating this process with your other remaining debts you can repay these off as well but it will take a long time to do so.