If you want to know whether a debt consolidation
plan or home equity loan is best, you’re going
to have to start by evaluating your circumstances. Once
you understand home equity and how it works, you may
find that this isn’t even an option.
The equity in your home is the difference between the
value of the property and what you owe against it. For
example, if your home is valued at $100,000 and you
have an outstanding mortgage of $60,000, the amount
of equity you have in your home is $40,000. That doesn’t
mean that you can expect to take out a home equity loan
for $40,000. The amount you could borrow against that
depends on the lender. Some limit loans to 90 percent,
meaning you can only borrow up to 90 percent of the
value of the property. Lenders set their own policy
on this point so the only way to know what to expect
is to ask.
But how do you know how much your property is worth?
You may need an appraisal to get an accurate figure,
though you can get an idea based on property values
in your neighborhood. Remember that a true market value
by a licensed appraiser is derived by evaluating similar
properties that have recently sold. So it doesn’t
really matter that the neighbor just built a million
dollar home next door – at least not until that
home sells, and not unless it’s in some way comparable
to yours.
After you know the value of your home and know how
much equity you have in the home, you can decide whether
achieving a home equity loan is even possible. You still
have to decide if it’s a good move. Remember that
you’re essentially putting your home up as collateral
for this loan. That means that if you don’t make
the payments, the lender has the right to repossess
your home. Be sure that you’re able to meet the
terms of repayment and that you’re ready to take
on this responsibility before you take this step.
Debt consolidation without a home equity loan can come
in several forms. An unsecured loan is sometimes possible,
though you have to have an excellent credit score and
a lender who trusts you. You may also have something
other than your home that you can put up for collateral.
Finally, you may do at least some debt consolidation
by using a single credit card to pay off all your others,
meaning you have one monthly payment instead of several.
Be aware of the interest rate you’re paying if
you choose this option.
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