Is debt consolidation with a home equity loan a good choice?

About home equity debt consolidation

A home equity debt consolidation loan is one that uses a second mortgage or home equity line of credit to repay a consumer’s debt. This allows the consumer to pay off all other debts using the equity in their home, and simply have one loan payment to repay, assuming that no other debt is accrued during the repayment period.

Using a home equity loan to consolidate debt has both benefits and drawbacks. One benefit is that by getting a home equity loan or line of credit, the consumer is usually able to get a lower interest rate.

Therefore, it can be a viable way to pay off debt with higher interest rates, like credit cards. Another benefit is that it can wipe out all the other debt and consolidates the payments into just one – to the bank who gave the loan. Still another benefit is the ability for consumers to deduct the loan interest expense from their tax obligations.

Drawbacks

One drawback of this type of debt relief is that the new loan uses the consumer’s home as collateral and can put the home at risk of foreclosure if the consumer cannot pay off the loan.

Another drawback is that many home equity loans or lines of credit come with points, which are expenses to pay for the loan and these costs add up quickly.

And yet another drawback is that, without a strict budget and debt management plan, the consumer may continue accruing debt through credit cards and other unsecured loans, and simply add new debt burdens on top of the home equity loan.