It is a common practice for people, who want to make home improvements or to borrow additional funds for other reasons, to explore the options of unsecured bank loans or methods to increase their credit card limits. However, these types of loans can charge some pretty steep interest rates. Consequently, one of the best ways for a homeowner to secure a loan with a low interest rate is to use their home as collateral. This allows the homeowners to take advantage of a debt consolidation loan program called the home equity loan.
With a debt consolidation home equity loan, homeowners can consolidate their current debts into one amount. A home equity loan consolidation allows various credit card balances and miscellaneous debts to be combined into one monthly payment, which the owner will repay in monthly installments.
There are many benefits to a home equity loan. To consolidate debt through loans creates simplicity in the life of the homeowner, as they no longer need to fill out and mail multiple checks per month. Additionally, this new monthly payment could be less than what the homeowner would have owed had he continued to pay each bill separately. The third, and most valuable, benefit of a home equity loan is that the homeowner is afforded the opportunity to improve a poor credit rating. With a home equity loan consolidation, the combined monthly payments are usually lower than the total amount of a number of uncombined loans, and therefore, more easily managed. This can lead to a point boost on the homeowners credit report.
Before securing a home equity loan, it is vital for homeowners to do their homework regarding this type of home equity mortgage. A small amount of research reveals that a debt consolidation home equity loan comes in two different forms. The two types of home loans are the Home Equity Loan and the Home Equity Line of Credit (HELOC). There are benefits and drawbacks to either form of mortgage refinance.
A home equity loan is a large sum of money loaned to the homeowner with the understanding that the funds will be repaid within a set amount of time. The lender will stipulate that the homeowner use their home as collateral. This type of debt consolidation home equity loan is usually repaid within a period of 10-20 years.
A Home Equity Line of Credit, on the other hand, functions more like a bank account. This form of debt consolidation home equity loan is one where the homeowner is allowed to borrow either the full amount at once, or portions of the loan at different times. For instance, a homeowner could initially borrow a small portion of the total amount offered by the lender. He is then free to make additional withdrawals from this account up to and including the full loan amount.
The flexibility of this debt consolidation home equity loan can be more difficult to manage. With this home equity mortgage, the amount borrowed is subject to fluctuations in the amount owed to the lender. Therefore, the lender cannot provide the borrower with a set time line for repayment. Instead, most lenders set the minimum monthly payments to repay the interest on the loan. If a borrower is not mindful of this fact, he could end up having to make a large balloon payment at the end of the loan.
With both forms of the home equity debt consolidation loans, the amount the lender can offer is based on the homeowners equity. To calculate equity, one simply needs to subtract the amount due on the mortgage from the estimated value of the home. The homeowner usually lists this estimate on their application; however, most lenders will require a third-party to make a definite valuation of the property during the final stages of the loan approval process. The homeowner could incur an additional fee for this service.
There are many other charges that a homeowner could have to pay if they receive a home equity debt consolidation loan. Possible fees include loan origination fees, closing fees, prepayment penalties, and early termination fees. It is a good idea to discuss these fees with the lender up front to avoid any surprises at closing. This information can also be found on the Truth in Lending Statement (TTL) and the Good Faith Estimate of Settlement (GFE). The borrower should receive a set of these documents before they accept the terms of the loan.
A debt consolidation home equity loan can be a very good option for homeowners seeking to refinance debts into a loan with a low interest rate. These types of loans are generally easy to qualify for as long as bad credit is not a factor. Anyone contemplating refinancing debt in this way is probably making a very sound financial decision.