For the home owner with some accumulated equity in his property, the ability to consolidate existing consumer debt is usually achievable and beneficial. A huge number of home owners withdrawal a portion of the equity in their homes for the specific purpose of paying off existing credit card balances and small personal loans.
What to know before proceeding:
The home owner must carefully analyze and understand the financial ramifications of using his home's equity to satisfy consumer debt prior to proceeding with such consolidation efforts. A number of significant potential concerns exist with such scenarios, and it may not always be in the borrower's best interest to use equity in this manner.
Generic consumer debt, specifically credit cards and small personal loans, are typically unsecured obligations, meaning that there is no tangible collateral in place to secure the debt. The original creditors for such vehicles usually base their acceptance and approval on little more than a credit report and borrower application. In the event that the borrower fails to repay the money used, the creditor must expend significant effort and financial resources to recoup the loan, and even if legal action results in a judgment against the borrower there is still no guarantee the creditor will get paid.
However, once a home owner uses a home equity loan to consolidate his consumer debts, these obligations are now blanketed beneath the new loan, which is actually secured by the home. If the borrower fails to repay this new obligation, the lender has the legal right and ability to take possession of the borrower's property. This fact alone is of sufficient importance to make a home owner think seriously about proceeding.
Additionally, the home owner must understand the difference between the amount of money he will absolutely end up paying with the equity consolidation versus retaining the existing debt vehicle. In many cases, despite lower monthly payments, consumers pay multiple times more money in the end when they replace credit card debt with home equity loans.