Wednesday, 19 July 2017

Home equity to consolidate debt - pros and cons

Has overspending got you into a lot of debt? Are your incomes flowing down on EMIs? Finding it hard to remember all the EMI dates? Many of us at some point of time get stuck in such situation, but what is the fix for this?  Try considering a home equity loan for paying of your debts. An equity loan can help you minimize your EMIs and help you save a lot of money.
What is home equity loan?
If you own a debt free house and you have built up a lot of debts on high interest rates, you can take a loan on your home as equity loan and consolidate all your debts at low or fixed interest rate. For example you have a personal loan of around five lakhs at 18% interest rate and a car loan of around 7 lakhs at 15% interest rate. You can opt for this loan for these amounts at around 9.5-10.5% interest rate with a high tenure and make life easy. There will only be one payment to make every month compared to multiple EMIs.
A lot of balance transfers, personal finance leads to such situation which affects your cibil score so it is advisable to go for this loan with less home loan interest rates available in the market.
We will sight some pros and cons if considering a home equity to consolidate debt;
Low, fixed interest rates
The interest rates in loans are less as compared to other loans and financial products like personal loans or credit cards. It is always a great option to opt for an equity and pay off all your existing debts as this gives you access to low interest rates. You can save a good amount of money by doing this.
Interest is tax-deductible
A home equity loan has no tax on interest and instead you get tax exemptions. If you are stuck with other loans you are bound to pay tax on the interest as well.
Flexible terms
You can opt for a flexible repayment term which can be good, as compared to other loans which you avail. Like for example if you avail credit card loans the maximum duration to pay it off would be 90 days, in terms of personal loans the maximum term is five years but when you go for this loan you can raise tenure  of the loan by ten to fifteen years. This gives you more time to pay your debts off.
Use the money to consolidate debt
Go for a home equity only for a consolidated debt. Do not try to use this privilege for luxury, if you use it for one of your wants but not the needs this will cost you a lot in near future when you are in an urgent need of money.
House as collateral
When considering an equity loan, understand that your house will be collateral as compared to the other loans which are available in the market like personal loans or credit card. If you fail to repay your EMIs on time you may lose your home as a result for the same. Many people make this mistake of taking this loan and lose their home when not paid the EMIs on time.

Risk of value drops

This is a bit complicated, as we all know home loans are processed on the market value of the home same goes for a home equity loan. If you avail a this loan for an X amount and due to market fluctuations the property rates go down, you will be paying more than what you have. For example if the value of your property is 50 lakhs and you have taken an equity of 45 lakhs and the market goes down resulting your property’s worth 40 lakhs then you will be paying high interest for a depreciating property.

Lose bankruptcy option

Compared to other loans like personal loans, credit cards which demand no collaterals, if you fail to honor the EMI amount you can file for bankruptcy. In cases of equity loans as your home will be collateral you lose the option for filing bankruptcy.

In conclusion, 

it will be suggested to lower your expenses and try saving money, which can help you in near future in case of emergencies. If you have crossed the line of debt and know there is no chance you can evade this, get a home equity loan only if you have run out of options because it may ease your situation temporarily but is a long commitment. 

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