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Understanding Debt
Refinancing Your Home & Home
Equity Lines of Credit.
Refinancing your home gives you a lump sum of money
(a loan) where your home serves as collateral. Similarly, a home equity line is
a form of revolving credit in which your home also serves as collateral. Because
a house is conceivably a consumer's largest asset, many homeowners use these types of loans only for major items such as education or home improvements, and not for
day-to-day expenses.
Many lenders offer home refinancing and home equity
lines of credit. By using the equity in your home, you may qualify for a considerable
amount of credit and/or a large loan. It is important to note, many lenders require
a home owner have at least 20% or more equity in their home to apply for this type
of credit and/or loan.
Before making the decision to refinance or take out a home equity line of credit you should weigh carefully the risks against the
benefits. Consolidated's Debt Management Program may be able to dissolve your debt
in 3 to 5 years, whereas you might be paying a secured loan off for 15 years or
more. Remember, failure to repay the loan could mean the loss of your home.
Warning: Consolidated does not condone the use of
equity to pay off unsecured debts!
Home Equity Line Costs
Many of the costs in arranging a home equity line
of credit may resemble the charges you pay when you buy a home. For example:
There may be a fee for a property assessment (appraising
the value of your home). An application fee, which may not be refundable if you
are turned down for credit. Initial charges, such as one or more points (one point
equals one percent of the credit limit). Other closing costs, including fees for
attorneys, title search, mortgage preparation and filing, property, and title insurance,
as well as taxes. Some plans even impose yearly membership or maintenance fees and
transaction fees every time you draw on the credit line. You could find yourself
paying hundreds of dollars to establish the plan. If you draw only a small sum of
money against your credit line, charges and closing costs could substantially increase
the cost of the funds borrowed.
Unsecured Loans
An
unsecured debt
consolidation loan places none of your possessions at risk, but the loan's interest
rate may be significantly higher than your current outstanding bills. In the end,
you may be paying double or triple the amount in interest of your original debts
or get side tracked making payments for years longer.
Either type of debt consolidation loan only places
you deeper in debt, complicating your financial difficulties, not solving them.
We get calls from people telling us that getting
a debt consolidation loan was the final cause of their financial derailment. After
they paid off their debts with
the loan, it was not long before the credit card
charges were run up again. Leaving them with both a consolidation loan payment and
credit cards to repay. Many consumers who obtain consolidation loans get back in
debt and return looking for yet another consolidation loan; never ending the cycle
of debt and never rebuilding their equity. Americans of all education and income
levels are falling into this trap.
