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Home Equity Debt Consolidation is a Great Concept on Paper
Staff - Mortgage Lenders Plus.com
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The primary reason people take out home equity loans is to refinance and consolidate expensive, short term debt. Obviously, cutting down on expensive debt is a laudable goal, but if you’re going to borrow to do it your spending habits will have to change as well. If not, you’ll just dig a deeper hole. So much for the lecture. The value of home equity debt consolidation takes some calculating; there are a number of factors to consider that are not evident at the outset. If you are carrying a large amount of debt and apply for a home equity loan, you may be unpleasantly surprised at the interest rate that is available to you. You may, for the moment, considered a subprime credit risk. If that’s the case, then the first thing to do is to make sure that the home equity money you borrow is cheaper than the debt you’re retiring. If one of your credit cards is at 9% and your home equity loan is at 10%, don’t borrow to close out the cheaper credit card. You should be prepared to retire the home equity debt consolidation loan as soon as possible. One of the reasons to get it out of the way is that it may hamper your ability to refinance your first mortgage when it becomes opportune to do so. When a first mortgage is retired, the second mortgage automatically becomes the first. So in order to refinance your original mortgage, the lender on your home equity loan will have to agree to remain in a subordinate position – the second lien on the property. Getting that agreement may cost you money. A home equity debt consolidation loan may also put you into the category of borrowers who are required to pay mortgage insurance. Talk to your primary lender, and determine if your home equity loan is going to trigger a renewed mortgage insurance requirement. It will probably depend on the size of the new loan, and how the original lender chooses to assess your principal mortgage against the current value of your property. It could be a hidden cost in your new borrowing that stays with you for several more years. Debt consolidation is a great concept, on paper. In order to make it truly cost effective, you’ve got to take every possible impact that new loan may have. Take a look at the home equity debt consolidation options that are available to you – get bids from multiple lenders. Then examine what the net impact will be, once the cost of the loan is factored in and you have a repayment plan in place.
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