Pros and Cons of Consolidating Debt with a Home Equity Loan

Thinking of consolidating your debt with a home equity loan? Here are a few things to keep in mind as you weigh your options:

Pros

Fewer monthly payments

By paying off your unsecured debts with a home equity loan, you’ll have fewer debts and debt payments to manage each month.

Fixed end date

If you’re only paying the minimum due on a large credit card debt, you could literally be paying for decades. Most loans usually have a clearly defined payment schedule, which spells out what you’ll pay, when it’s due, how much will go toward the principle, and when you’ll have the whole thing paid off.

Lower interest rate

By leveraging the equity in your home, you should be able to secure an interest rate comparable to a mortgage, which will likely be lower than an unsecured loan and much lower than a credit card.

Interest deductions

Moving your debt to a home equity loan could save you some money at tax time. That’s because you may qualify for a mortgage interest deduction, which would allow you to claim a reduced income based on the amount of interest paid on your mortgage (and home equity loan).

Cons

Best credit gets the best terms

If you’ve already missed a few payments and your credit score has suffered as a result, you may find it hard to qualify for loans with low interest rates and other helpful terms, even if you’re using your home as collateral.

Your home is on the line

You should always be careful using your home as collateral for a loan. If you default on a home equity loan you run the risk of facing a foreclosure.

Less flexibility

Should your situation deteriorate and you struggle to make any kind of debt payments, you may find yourself considering bankruptcy. Bankruptcy is a perfectly acceptable option, but your options may be somewhat limited if your debts have been consolidated into a home equity loan or mortgage. You may not be able to discharge your debts without losing your home in the process. Be sure to consult with a qualified attorney if you’re considering bankruptcy.

Closing fees

Most loans include a variety of fees. Keep in mind the costs of taking out a loan in the first place.

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