Consolidate Your Debt - Options For Home OwnersSo you own a home and want to consolidate your debt? Cash-out Refinance - You refinance more than what you currently owe in your home and keep the extra cash for your needs. Advantages > Your interest expense is now tax deductible. > Lets you obtain a lower rate if your first mortgage rate is high compared to today's rate. > You are actually replacing your first mortgage, so you still have one bill to pay. > Interest rate is usually lower than on a home equity loan. > You get all your money up front.
Disadvantages > You have to pay closing costs which could be hundreds or most likely thousands of dollars. > If you end up borrowing more than 80%, you'll have to pay Private Mortgage Insurance (PMI), which is a big no-no. > You have to pay interest on the entire balance of loan (because you get all your money up front, remember?). > If you don't change your ways and continue to incur high-interest credit card debt, you'll put your home at risk.
Home Equity Loans - You borrow a fixed amount that you will pay off in a certain period of time. > Your interest expense is now tax deductible. > Home equity loans are usually shorter terms than first mortgages (5 to 15 years). > Have a fixed interest rate, so your rate can never increase and you make the same payments each month. > You get all your money up front. > No closing costs.
Disadvantages > You are actually adding another mortgage, separate from your first. So you have two home loans and another bill to pay. > You have to pay interest on the entire balance of loan (again, remember the up front thing). > If you don't change your ways and continue to incur high-interest credit card debt, you'll put your home at risk.
Home Equity Line of Credit (HELOC)- You borrow with a credit line (similar to a credit card) up to a certain amount. You can withdraw money to consolidate your debt as you need to during a time limit set by the vendor, but it doesn't come with a set period in which it will be paid off. Advantages > Your interest expense is now tax deductible. > Gives you alot more flexibility when you consolidate your debt because you pay interest only on what you borrow. > Have a variable interest rate that fluctuate over the life of loan - good when rates are decreasing. > No closing costs.
> You are actually adding another mortgage, separate from your first. So you have two home loans and another bill to pay. > Have a variable interest rate that fluctuate over the life of loan - not good when rates are increasing. > If you don't change your ways and continue to incur high-interest credit card debt, you'll put your home at risk.
So which one is best? It depends on your needs. If you are consolidating your debt because of high credit cards, then go with the home equity loan. It is lower risk vs. a HELOC because you know when you will finish paying off the debt...a HELOC simply has the same feel as a credit card and is too tempting. A cash-out refinance loans option is expensive and may work best if your first mortgage's interest rate is incredibly high vs what you can get now. So if you know how much you need and you need it now, go for the home equity loan. However, there are times a HELOC will be the best choice - when you need the money at different times for a specific purpose...but again, higher risk if you're not careful. Simple, huh? Whichever way you decide to go with, please re-read the last point of all three disadvantages. UPDATE: A HELOC may turn out to be the best choice to
consolidate your debt
for added flexibility. It may even help you to pay off your mortgage much earlier than you dreamed possible. Learn more
here.
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