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Home Equity Loans

Taking Out Home Equity Loan 

When buried under a mountain of debt there are many options one can consider ranging from walking away from it all, credit counseling, or taking out a home equity loan to consolidate your outstanding debt. Perhaps the most reasonable solution of all for managing one's debt is budgeting. Budgeting  essentially is living within your means, or not spending more than you bring in. 

However, if you must, a home equity or debt consolidation loan involves using your home equity, or ownership in your home, as collateral for the amount borrowed. The proceeds can be used to pay off existing debt such as credit cards, medical bills, car loans and other obligations.

 Pros & Cons: Home Equity Loan

Pro

• Interest on the home equity loan may be deductible up to $100,000.

• Interest rates on home equity loans are lower than credit cards and unsecured personal loans.

• Proceeds form a debt consolidation loans can be used for a variety of purposes: consolidating existing debt, school, improvement on your home, medical bills and a variety of other uses.

Your make one payment once a month on the consolidated debt instead of many.

 Cons

• You must change the spending habits that contributed to your current financial malaise. If you don't you could find yourself hopelessly in debt again this time with your home on the line. Make sure your payments are on time. If you default, you could lose your home.

• Loans of this type can be risky for new homeowners who have not established themselves in a career and are not used to managing a household budget. They can also be risky for senior citizens as they would be tapping into their nest egg close to retirement.

• If you chose a line of credit, interest rates can vary month to month.

• If the real estate market slows, the value of your home can drop resulting in you owing more than it's worth.

While payments may be lower on a home equity loan it could cost you more because payments are stretched over a longer time frame.

• You might not be able to lease your home during the term of your loan. 

If you do decide to borrow against your home you should first analyze why you are in the financial situation you're in and make the necessary lifestyle adjustment you need to make.  With a home equity loan you are converting short term debt into a long term obligation secured by your house. If you continue down the same path without making the needed lifestyle adjustment you will lose your home.

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