Given high credit card interest rates and associated fees, debts can build quickly. Given the overwhelming pressure and stress that these financial problems can create, many people are looking for a fast and effective way out. If this sounds familiar, you may be wondering should you use your house equity to consolidate your debts. This will give you the opportunity to turn all of your monthly payments into one easy manageable payment. It can also significantly reduce the amount of money that you are paying in interest. There are, however, a number of factors that you should consider before making this major decision.
Before making any decisions of your options in debt relief, you have to make an in-depth assessment of your current financial circumstances in order to determine whether or not outside assistance is really necessary. You may have the ability to pay down your debt within a fairly short period of time by simply reducing your spending a building a tighter budget.
There are, however, some signs that indicate a dire need for help. For instance, if credit cards have become essential rather than a mere luxury, you probably need assistance. You also have to account for regular borrowing with a regular inability to repay and the ability to only make the minimum payments on your past due accounts. If your wages are being garnished or if creditors have begun to stalk you, taking fast action is likely essential.
Debt consolidation is a loan that will allow you to consolidate or group a number of accounts into a single, monthly payment. If you own money to three credit card companies, you would be able to pay each of these cards off. The only obligation that you would have would be to pay down the loan that you used to consolidate these accounts. You would be paying the same amount of money, but it would be paid in a single payment rather than three.
These loans are tied directly to the home mortgage of borrowers. These loans can be obtained by taking out a second mortgage or refinancing. The funding you receive will be backed by your home equity and it will probably have a much lower interest rate.
Lower interest rates are the result of the debt being secured by collateral. This is different from unsecured debt which is not tied to any collateral and therefore comes with significantly higher interest. Unsecured accounts invariably entail higher risk and thus, lenders charge more for them. Although having a lower interest rate can be beneficial, there is also the risk of losing any collateral that you’ve used to secure your loan. This is why it is important to consider all factors before applying for this funding.