What Are Your Debt Consolidation
Mortgage Loan Options?

Many homeowners, concerned with their high interest credit card debt, take out a debt consolidation mortgage loan. They use the equity in their home as security for a low interest debt consolidation loan. There are several types of mortgage loans available for debt consolidation and credit management. However, be sure to do your homework before you sign on the dotted line. It will save you a lot of headaches.

What to do Before Considering a Debt Consolidation Mortgage Loan

Here are two things you need to do before considering any type of mortgage loan.

First, find out how much equity you have in your home. Here’s how to calculate your home equity. Find out the current assessed value of your home. This will be different from what you originally paid for the home. Then, subtract what you still owe for your house from the current assessed value. This difference is your equity.

Note: If you have very little equity in your home, a debt consolidation mortgage loan may cause you more problems than it is solves. In addition, if you plan to move in the near future, use great caution. Let me explain.

When you borrow additional money against your mortgage and the total of what you owe is more than the value of your home, you face two potential problems.
1) Your mortgage company may make it difficult for you to put your house up for sale.
2) If you do sell your home (even at market value), you will still have debt left over from your house, which you must repay.

If this is your case, you’d be well advised to build up your equity before pursuing a mortgage loan for debt consolidation. The only exception would be that you plan to remain in your home for several years and you absolutely know you can make the payments.

Second, itemize the debt you want to consolidate. For example, for each credit card you own, write down the amount you owe, the interest rate and what you are currently paying each month. If you have medical bills, do the same thing. Do this for every debt you want to pay off with a debt consolidation mortgage loan.

You will need your debt information to get a realistic picture of where you are and whether a bill consolidation loan can really help you. It will also facilitate the paper work that will be required to get approval for your loan.

What Type of Debt Mortgage Consolidation Loan is Best for You

There are three types of mortgage loans commonly used to consolidate debt. All of these loans are secured by your home. The pros and cons of each are discussed below.

Home Equity Loan – Second Mortgage

Pros: A second mortgage consolidation loan gives you a fixed payment and interest rate over the life of the loan. The payment time usually ranges from 10 to 30 years. There is usually no prepayment penalty and the interest is usually tax deductible.

Cons: If you default on your payment, you could loose your home. If the total money you borrow for both your first and second mortgage is close to the total value of your home, you may have trouble selling your home. If you do sell it, you will likely have additional debt, which you must pay.

Home Equity Line of Credit

Pros: A home equity line of credit uses your home a collateral. It sets up a revolving line of credit. The available credit can be used over and over, as the balance is paid down. Usually this line of credit has a draw period of five to ten years. The interest rate is variable. The amount of your payment depends upon your balance. You can pay interest only, but this is not a good habit. Payments to principal immediately reduce your monthly payment.

Cons: If you default on your payment, you can loose your home. You must keep your line of credit open for the agreed upon time. (However, if you balance is zero there is no payment obligation.) If you terminate your agreement early, you will pay a penalty. After the initial period (5-10 years), the mortgage loan converts to a variable principal and interest loan which must be paid off over the next five to fifteen years (depending upon your agreement).

Home Refinance

Pros: A home refinance loan is helpful if you can find a lower interest rate than you are now paying on your home. Simply speaking, you are getting a loan from another bank or institution to pay off your current loan. When mortgage loans take a significant dip, this can save you money. It can also free up additional cash from your equity.

Cons: When you apply for a home refinance loan, you may have to pay substantial fees for closing. Look for the terms closing cost and points in the agreement. If you pay large fees to get the new mortgage loan, the lower interest rate may not really save you money.

Refinance your home to consolidate debt regardless of credit history.

If you own a home and have some equity built up, a debt consolidation mortgage loan can free up some money. However, be cautious and do your homework.

Get at least three to five quotes based upon an APR rate. The APR is the projected yearly interest rate, taking into account points, fees and the interest rate. This will give you a true comparison. You want to compare apples to apples.

With so many choices and so much competition, you should be able to get a good deal on a debt consolidation mortgage loan. Use it wisely.

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Debt Consolidation Mortgage Loan