Dissecting the Debt Consolidation Effect

By Kelly Richardson
LoanPage.com Columnist

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Debt consolidation comes in a variety of forms. Home equity loans. Balance transfers. Cash-out refinancing.

They all seem tempting when you're looking at several maxed-out credit cards. But many a sad story has begun when homeowners didn't understand the effects of each option before they signed.

Home Equity Loan. Essentially a second mortgage on your current home loan that offers you the opportunity to use the equity you've built up to borrow against for cash.
  • » Good Because. It's an option for debt consolidation if you have no other means of acquiring cash. Home equity loans allow you to borrow up to a certain percentage of your home's appraised value.
  • » Watch Out For. Borrowing the maximum amount and then selling your home. If you don't stick around long enough to recoup your equity, you could be selling your house for less than the mortgage balance.
Balance Transfer. A credit card offering that allows you to write a check to pay off other high interest cards, moving your debt onto one credit account.
  • » Good Because. You have the opportunity to save yourself thousands of dollars in annual interest charges that you might otherwise be paying. Plus, writing those checks is super-convenient.
  • » Watch Out For. Moving your revolving debt around too much. Some credit bureaus may deem you a lending risk if they see too much debt juggling. Don't transfer balances more than a couple of times.
Cash-out Refinancing. Refinancing your current home loan in order to pull the equity out of your home and restructure your mortgage for a lower annual percentage rate.
  • » Good Because. Again, your home is a valuable commodity that has cash value, depending upon the amount of time you've spent there. The longer you stay in it the better chance you have of building up more equity and recouping the difference.
  • » Watch Out For. Borrowing too much. There is a fierce foreclosure market growing fast because homeowners owe more than they can sell their houses for in a softening real estate market.
The best way to ensure that you select the best debt consolidation method for yourself is to consult your lender. And if your debt is beyond your control, consumer credit counseling should be your next contact.

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About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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