Debt Consolidation Mortgages, Home Equity Loans and Lines of Credit

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If you own a home and have a debt load you can no longer handle, one place to go to solve the problem is to the equity in your home. This can mean either getting an entirely new mortgage (sometimes called a debt consolidation mortgage) or applying for a Home Equity Loan or Home Equity Line of Credit. The best option for you will depend on how much equity you have in your house already, and how long you’ve had the mortgage. We’ll review all three options in this article.Debt Consolidation MortgagesGetting a new mortgage to consolidate your debt is a good deal for people who having been paying their mortgages very long. This is because of the way mortgage amortization schedules work – you pay most of the interest on your loan upfront.So if you have a 30 year mortgage and needed to get a debt consolidation mortgage, it would be much better to get the mortgage in the first ten years of your mortgage’s repayment, rather than in the last 10 years. In the last ten years, you’d have already paid all that nasty interest, and would now be paying your mortgage’s principledown. To get a new mortgage then would almost be just tossing away all that interest you paid for, for nothing.But getting a debt consolidation mortgage in, say, the third year of your 30 year mortgage, you’d be starting your mortgage payments over again fairly early. In other words, people with little equity in their homes would probably benefit more from a debt consolidation mortgage than a home equity loan or line of credit.Keep in mind that getting a new mortgage will require a new closing, and mortgage closing can cost hundreds, even a couple of thousands of dollars. In this aspect, debt consolidation mortgages aren’t as good a deal as home equity lines of credit, which can be gotten with no closing costs.Getting the Equity Out: Home Equity Loans and Lines of CreditDon’t think that someone who’s in the last ten years of paying off a 30 year mortgage is in worse shape that the person on only year three, though. Quite the opposite. Home equity loans and lines of credit are among the best options for a debt consolidation loan.If you meet the following criteria, all that interest you’ve been paying suddenly becomes a major tax deduction:- you itemize your tax deductions- you are deducting interest for your first or second homes only- the loan is for no more than $100,000- the interest you want to deduct on any amount of the home equity loan can not be more than the difference between the market value of your home and your mortgage.For example, say your mortgage is for $200,000 and the market value of your home is $250,000. You can not deduct more than the interest on $50,000 worth of your home equity loan. Of course, owing more on your home than its worth is a very, very bad situation in the first place.The biggest drawback with home equity loans and lines of credit is that your house is the collateral, so if you don’t change your spending and earning habits and turn your debting into saving, you could find yourself unable to pay the home equity loan, and then in a position where you could lose your house.Home Equity LoanThese debt consolidation options usually have a fairly low interest rate, but the rate can be variable. You take out a lump sum to consolidate your debts, then pay the home equity loan back with a fixed monthly payment. Be sure you understand the terms of the loan – those variable rates can turn a good loan into a bad loan.Home Equity Line of Credit (aka HELOC)This kind of loan is a bit more like a credit card. You get approved for a given amount, and then you can draw as much as you want from it, whenever you want, by writing a check. The amount the lender gives you depends on your home’s value (both Home Equity Loans and Lines of Credit usually involve getting an appraisal of your house) and how much you ow on your mortgage. Typically, they’ll give you 70-80% of the difference between the two.Do NOT work with lenders that encourage you to borrow more than the value of your house. In today’s uncertain real estate market (and larger economy), if you take a loan like that out, and the real estate values in your neighborhood drop, the lender may be able to call your loan. That means you either pay up, or they take your house. This same principle applies to the recently very popular interest-only mortgages.Avoid these risky loans at all costs. The idea of getting a debt consolidation loan is to get you out of financial trouble, not into more.