Home equity loans and lines of credit have seen explosive growth in recent years. The most common reasons that homeowners take such loans are education, renovation, major purchase, and to consolidate debt. If you are a homeowner, you probably receive several notices advising that now is the perfect time to consolidate debt each month. Be careful. Although the prospect of consolidating debt can be very exciting it is not without strings. Many unsuspecting homeowners do not fully understand the terms of the agreement and find themselves in more trouble after debt consolidation than before. It is easy to see why. The interest rate on home equity loans and lines of credit are comparatively low. Additionally, the expense is often tax deductible. But again, there are dangers. As a homeowner, you are essentially taking a second mortgage on your home. As your home appreciates and as you make payments each month you build what is called equity. A home equity loan or line of credit allows you to access these funds. You can use this money to consolidate debt or any of a number of other things that require a reasonably large sum of money at attractive interest rates. Of course, the money must be repaid to the lender that advanced the home equity loan. Typically, this payment is several hundred dollars less than the total amount paid to the original creditors. Homeowners appreciate the financial relief consolidating debt brings. Home equity loans are undoubtedly a useful tools as it is easier and less stressful to make one small payment than it is to make several payments that take a bigger bite out of your budget. If you are considering a home equity loan to consolidate debt examine your reasons and your readiness before you begin the process. How did you come to find yourself in your current situation? What is a medical emergency or frivolous and impulsive spending. If you are a victim of your own inability to police your spending, what are you prepared to do differently when the slate is clean? You must realize that the loan is secured by your home. In the event that you are unable to pay the lender will repossess your home to cure the default. If you are not prepared to change your spending habits you may find yourself repaying the debt consolidation loan on top of newly generated debts. In the worst case scenario, failure to change your habits and reorder your priorities could result in the loss of your home. Shop around and consider the long-term impact of your loan decision. What is the interest rate and how much will the loan cost you annually and during it's life? Make sure that you read the entire contract very carefully. Know if there is a penalty for early payment? Learn about late payment costs and minimum payment amounts. Can you change your mind within 24 hours? What happens if you have an emergency and need to miss a payment? Who will service your loan? It is critical that you have an intimate understanding of what you are committing to before you sign anything. Ask questions until you can think of no more - even if they seem obvious or silly. Consolidating debt should bring relief not heartache. It is up to you to do appropriate research with your needs and interests in mind so that you find the most favorable deal for your circumstance.
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