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Are Home Equity Loans a Debt Consolidation Solution or Nightmare?
   

If you are a homeowner, you probably also have some unsecured debt. After all, most homeowners had to establish credit prior to being rewarded with a thirty year mortgage loan. Consumers usually establish credit by means of using credit cards, department store cards, or even automobile loans wisely and responsibly, thereby proving to creditors that they are able to handle loans and credit and that they will most likely repay whatever they owe.

Homeownership itself may present you with some bills you might not have counted on. After all, when the roof leaks or the toilet is backed up, you can no longer call the landlord to come in and fix it, but instead you will have to do so yourself and on your own dime. Usually this means going to the local big box home improvement store, and perhaps signing up for a store credit card. Other times it might mean applying for another credit card and then putting a new roof or a costly plumbing job on the plastic.

Yet all these little expenses and left over debts from the pre-homeownership days add up, and before you know it, you might be struggling to make ends meet. It does not take much to topple your budgeting efforts. If you have an adjustable rate mortgage, you may have already experienced the crunch on your budget with ever-rising rates. If you have a fixed rate mortgage, you may still have experienced the crunch, maybe in the form of supplemental tax statements or maybe when the escrow office of your lender informed you that in the lat calendar year not enough funds were withheld for the escrow account, and the shortage will now have to be made up, adding another three- to four-hundred dollars to your monthly bill.

If you find yourself in such dire financial straits, you still have options available. You may choose to consolidate your outstanding debts via loan. Homeowners usually find the first place to look at is the idea of a home equity loan, yet beware! A home equity loan may be a consolidation solution or a nightmare! Here are some pros and cons on the home equity loan as debt consolidation vehicle:

Con: If you have mostly unsecured debts that are choking the life out of your budget, you will be paying them off with a secured loan, which is guaranteed by your own home! In reality this simply refers to the fact that the credit card company, should you be unable to pay them, may ruin your credit, send you to collections, and declines you any further credit, but this is about as much as they can do. If you are unable to pay your home equity loan, on the other hand, your lender can force the sale of your home by means of a foreclosure, leaving you essentially homeless.

Pro: If you are able to pay your mortgage and home equity loan every month, you will be able to save a lot of money. The odds are pretty good that the interest rate on a home equity loan is lower than the median interest rate of your credit cards and department store cards.

Con: Unless you cut up your cards and cancel your credit accounts, the odds are pretty good that before long you will be running them up again, and now you will not only have to once again pay your creditors, but also your home equity loan.

Pro: Not all home equity loans are created equal. As a matter of fact, you can usually choose between a fixed loan that has a fixed interest rate and a fixed number of payments, or a line of credit with a variable rate that will permit you to take out only as much as you want, and that will permit you to continue to draw against it as you pay it down. These loan options, however, are not always available if you have had a bankruptcy on your credit in the last seven years.

As you can see, a home equity loan might be your consolidation solution or your nightmare, depending on your individual financial situation. Since this involves your biggest asset, your home, it is wise to weigh all your options, shop around, and ask lots of questions of prospective lenders.

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SolveYourProblem.com : 2007

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