The Drawback Of Consolidating Debts With Home Equity Loans

By on November 13, 2014

With all the marketing whirlwind that goes around talking up the benefits of consolidating your debts with a home equity loan, it is actually tough to find anything information concerning the drawbacks of it. This is because all the articles and editorials about mortgages warning people about it are drowned in the overflowing of resources promoting the advantages of it.

Maybe some parity should be given. Because like all investments and financial decisions, there are always 2 sides of the story. You read about people saving thousands of dollars from cashing out with refinancing all the time. But stories of people going into an uncontrollable debt spiral seldom get mass attention.

The mounting cost of living in our modern worn, due to the ever increasing prices of all our necessities like gas and food, are making it extremely hard for the average person to keep himself afloat financially. This has compelled many to make the necessary adjustments in their spending behavior, although it is not always enough, as you tend to come up short still. That is how scary it is to live in a developed economy. Because for some reason, businesses more often than not, decide that consumers should pay the price of rising operating costs instead of finding their own ways to reduce their costs.

To escape from this costs of living nightmare, many are resorting to debt consolidation as a potential solution to their financial problems for both long and short term. Under the circumstances, a lot of homeowners have come to a decision: take advantage of their home equity built up over the years and get hold of a home equity term loan in order to consolidate their debts. Of course, all loans carry their own benefits as well as risks and a home equity loan is no exception, as it also carries with it a distinct risk. A risk that many people are not well-informed on.

It is a fact that you are able to save a lot of money every month, by consolidating with a suitable home equity loan. Instead of having to make several payments, you only need to pay just one payment each month and that too at a much reduced rate of interest. And with the low costs associated with a secured loan, borrowers will actually save money at the same time. Nowadays, lending institutions keep flooding people in general with propaganda advertising to convey to them these advantages are the only solution to all their economic problems.

However, there is one thing that all these lending institutions fail to mention: these equity loans that they so skillfully and cleverly advertise over the media, are in effect made secure by your very own house; thus, by availing yourself of these loans, you are placing your home right on the line.

It is a beautiful strategy by lenders. They get to sell you their product – money. Look forward to the profits that will come in – interest. And should the borrower fail to repay the money on a timely basis, lenders get to foreclose the property and get all their money back. It doesn’t matter if the house is sold at a low price because they will get their money back anyhow.

This signifies that you could very well be taking in debt that is not at present secured by any assets, like medical bills or credit card debts, and effectually binding them into your house. As this places the home at grave risk, it remains a crucial decision that you should consider with the attention it deserves, carefully. If you are already drowning in debt, you could arrive at the same predicament all over again. Only this time, you might just lose your home.

If you are single, this might be less of a risk to take as you will not be dragging anyone else down with you should things turn sour. But what if you have a family who depends on you for income? How much worst is it going to get if they have to suffer from not having a home because of your own personal debt problems? It is not just financial hardship that they have to manage. There are also mental and social aspects that you have to think about.

Any wise consumer takes into account, things that are way beyond what all these lending institutions tell him. The problem is that many consumers still do not put enough weight on how financially dangerous such a move might be. Thus pondering in advance, on what could possibly happen, is definitely to your advantage. For instance, let’s for a moment consider the consequences of you being able to pay off only a part of the debt, by means of a home equity loan.

What with medical bills, credit card bills, and other sundry expenses, it can be indeed hard to pay the principal, and a possibly higher rate of interest. If you happen to default on the monthly payments, it can have a harmful effect on your credit. However, it does in no way place you at the risk of losing your own home. Even though you could be cursing whenever you receive your monthly paycheck as you immediately see most of it going into debt repayment, you could get out of it should your income increase sharply or from a good annual bonus.

Home equity loans don’t do away with debt altogether and has to be paid still, the only thing is that it takes on a different form. It comes secured with a low interest rate. But do take note that although the interest could be lower, you are likely to be taking on a longer term. Meaning you end up paying more accumulated interest over the years. You might never be able to pay off your mortgage. And there can still be times when your budget is tight and it could be difficult to make those payments; at such times your home is at risk.

Consolidating one’s debt by means of borrowing against home equity is indeed helpful. However, any borrowing of this form entails placing an invaluable asset, like your home, at risk. So such a thing ought to be considered, very carefully indeed.



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