A home equity loan is basically a second mortgage on your residence. It offers the same benefits as a first mortgage, which makes this type of loan an excellent way to consolidate all your debts into one monthly payment.
The average person has multiple types of consumer debt: one or two vehicles, several credit cards, and perhaps a personal loan. Interest and finance charges on consumer debt are not tax deductible. You've basically given your lenders a large sum of money for which you receive nothing in return.
The interest you pay on a first or second mortgage against your primary residence is tax deductible. So it would be a wise move financially to transfer your consumer debt to a tax-deductible loan.
Car loans and credit cards charge a significantly higher interest rate than a home mortgage. Moreover, if you are late with just one payment, even if it was delayed in the mail, your lender has the right to increase the finance charge. For example, a credit card with a 12 percent interest rate could jump to 18 percent, or whatever the law allows in your state of residence.
Home equity loans have a fixed rate of interest for a specified number of years. It's easy to check the prevailing rate in your area on Bankrate.com. The variables include your credit score, the amount you wish to borrow, and the city in which you live. At the time of this writing, for example, there are several lenders in the 4 percent and 5 percent range in Philadelphia but the rate is above 6 percent in Daytona Beach.
Although you will pay a late charge if you don't make a payment on time, the interest rate will not change on a fixed rate home equity loan. This allows you to continue paying down the balance according to the amortization schedule.
You can take as long as 15 or 20 years to repay a second mortgage. The longer your loan, the lower the monthly payment. If you owe a large sum on your credit cards and car loans and are struggling to make the minimum payments each month, then calculate the savings offered by a home loan.
For example, if you have seven credit cards and two car loans, compare the combined monthly payment of these loans to the corresponding monthly payment of a second mortgage. It should remove the strain of living payday to payday. Additionally, the lower interest rate of a mortgage means that more of your monthly payment goes toward paying down the balance.
Credit Score Boost
Paid-off accounts boost your credit score. Rather than have a credit history filled with multiple forms of debt, it will reflect car loans and credit accounts with a zero balance. As long as you make the mortgage payments on time each month, your credit score should continue to rise.
Look into this type of home loan for more information about what it can do to help you.