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Home equity loans nowadays are not just used for remodeling
kitchens or financing your child's education. They can also be used for debt
consolidation. Imagine a scenario where you have run up huge credit card debts
over a period of time. Credit card interest rates, ruinous as they are, can be
avoided by rolling your debts into a home equity loan.
Refinancing your debt via a home equity loan shifts your debts loan to your
home. The flip side to such a move is that your home is on the line. However,
tax deductions on interest repayments make it an attractive proposition.
Moreover, in such a case of loan consolidation, it makes financial sense to go
for a fixed term equity loan.
Newer products such as adjustable rate mortgages, wherein borrowers do not have
to restrict themselves to a fixed home equity loan or a home equity line of
credit, are hitting the market. One can take a home equity loan wherein the loan
remains fixed for the initial period (at the discretion of the borrower), and
after the period elapses, converts itself into a line of credit. Borrowers of
these kinds of loans are normally individuals who are concerned about rising
interest rates and yet want to keep their financing costs at a reasonable
minimum. The only downside to this hybrid structure is that interest is charged
on the entire lump sum as opposed to a plain vanilla home equity line of credit.
One of the many reasons that home equity loan products have become such a rage
in recent times is because of the low interest rates. However, all that glitters
is not necessarily gold. Borrowers need to read the fine print carefully before
burdening themselves with a home loan to pay off credit card bills. One, not
only are they converting short-term debt into long-term debt, but two, most home
equity loans are not for financing that expensive vacation, but meant for
something more long-lasting. |
