Debt Consolidation Debate: Home
Equity Loans Or Unsecured Lo |
By Maria Ny |
|
According to the Federal Reserve, Americans carry on average, $5,800
in credit card debt from month to month. Making the minimum monthly
payment on that debt would take 30 years to pay off and include an
additional $15,000 in interest. According to the Administrative
Office of the Courts, 2,078,415 bankruptcies were filed in 2005?the
largest number of bankruptcy petitions ever filed in any 12-month
period in the history of the federal courts. With mounting credit
card debt and the new tougher bankruptcy laws, people are looking
for alternative ways of managing their debts.
Debt
consolidation loans have become a popular way to free up money each
month by consolidating several monthly credit card payments into a
single lower interest loan. But, the question is whether it's best
to consolidate your debts into a home equity loan or an unsecured
debt consolidation loan.
Debt Consolidation Home Equity Loans
A home equity loan is a one-time lump sum of money you receive in
the form of a second mortgage that is secured by the equity in your
home. Equity is the difference between how much the home is worth
and how much you own on your mortgage. Home equity loans generally
have lower closing costs than refinance mortgages. Mortgage
refinancing closing costs typically include: title and escrow fees,
lender fees, points, appraisal fees, credit fees, insurance and
taxes, with the major expense being the title and escrow fees.
A home equity loan is usually a fixed interest loan with rates that
runs slightly higher than that of a first mortgage, unless it's a
125% Loan To Value (LTV) mortgage that allows homeowners to borrow
beyond the value of their homes. Those rates usually run much higher
that other mortgages and the origination fees can be as much as 10%
of the loan balance. Home equity loans usually are repaid over less
time than first mortgages, with repayment periods being as short as
five years, but typically 15 to 20 years. Like a first mortgage, you
have to pay off the balance of a home equity loan when you sell your
home, so it's best to find out if your loan carries prepayment
penalties or balloon payments, in case you sell your house before
the loan matures.
Benefits and Drawbacks of Home Equity Loans
The main benefit of a debt consolidation home equity loan is that
most states allow you to deduct up to 100% of the interest you pay
on your taxes. Home equity loans typically have lower interest rates
than unsecured loans, and borrowers can get relatively large amounts
of money.
While debt consolidation home equity loans have
attractive benefits, there are also major drawbacks. One is that if
you don't make the payments, the loan can be foreclosed and you can
lose your home even if you go into bankruptcy because secured loans
are not dischargeable by Chapter 7 bankruptcy.
Another
drawback is that exploitative lenders target homeowners, especially
those with low incomes or poor credit. According to the Federal
Trade Commission (FTC), there are many predatory scams, including:
?Equity Stripping: The loan is based on the equity in your home, not
on your ability to repay it.
?Loan Flipping: The lender
encourages you to repeatedly refinance the loan and often, to borrow
more money, which incurs additional fees and points that increase
your debt.
?Bait and Switch: The lender offers one set of
loan terms when you apply, then pressures you into higher charges
when you sign the loan papers.
?Deceptive Loan Servicing: The
lender doesn't provide you with accurate or complete account
statements and payoff figures. That makes it nearly impossible for
you to determine how much you've paid and how much you owe.
If you are not sure whether a home equity loan is right for your
needs, you may want to consider an unsecured personal debt
consolidation loan.
Personal Unsecured Debt Consolidation
Loan
If your credit is relatively good, and you are employed,
you may be able to obtain an unsecured personal loan that you can
use to pay off some or all of your high interest credit card debts.
With a personal unsecured debt consolidation loan, no collateral is
secured. This means that the lender is relying only on your promise
to repay the loan according to its terms and conditions. While the
loan amounts are not as much as those of home equity loans, they can
be up to $10,000. Loans of up to $1,000 may not even require a
credit check.
Unsecured debt consolidation loans have lower
interest rates than credit cards, but they generally are higher than
home equity loans. Some loans allow you to take anywhere from one to
five years to repay, which can ease financial stress.
Benefits and Drawbacks of Unsecured Loans
The main benefit is
that if you are forced into bankruptcy, the unsecured debt may be
discharged in the bankruptcy proceedings because there is no
collateral securing the loan.
The main drawback is that you
must have good to excellent credit to get an unsecured loan, and the
loan amount is usually less than a home equity loan. The interest
rates on unsecured debt consolidation loans are typically higher,
and it is not unusual for debt consolidators to obtain commissions
of 10% or more on your loan, which may inspire them to encourage you
to obtain a loan which is not in your best financial interests.
In Conclusion
The answer to the question of whether you
should get a debt consolidation home equity loan or unsecured
personal loan all depends on your financial circumstances. If you
have relatively good credit, are employed, and only have a few
debts, you may want an unsecured personal loan. However, if your
credit is not so good, or you have a lot of high-interest credit
card debts or secured debts, a home equity loan may your best
answer.
Resources: Federal Reserve, Federal Trade
Commission(FTC), The Administrative Office of the Courts,
Bankrate.com - What home equity debt is Banking.About.com - The
Basics of Home Equity Loans. |
|
|
|
|
|
