Which loans are best for debt consolidation - home equity loans?


Very often financial advisors consider debt consolidation through home equity loans. Credit card debt, car loans, high interest personal loans - they can often be managed very successfully through a lower rate home equity installment loan.

What are home equity loans and why are they good for debt consolidation?

Home equity is the value of your home minus what you owe on your first (and perhaps second) mortgage. If you bought a $350,000 house with $50,000 down and a first mortgage for $300,000 your existing equity at the time of the purchase will be $50,000.

Within 10 years, your house might be appraised at $450,000 if appreciation levels were high. You might have paid off some $50,000 of your mortgage debt by that time. Your existing home equity will be around ($450,000 - $300,000 + $50,000) = $200,000. That is, you will have up to $200,000 to use for any purpose. With some home equity programs you could borrow more than the existing equity in your house

Homeowners could tap their equity as a cheap way to borrow money. Why that? With an existing first mortgage, you can take a home equity loan (HEL), or home equity line of credit (HELOC), or a standard second mortgage. All three are likely to carry interest rates of usually 2 to 3% higher than the first mortgage loan interest rates, depending mostly on

  • your credit score and history;
  • current home equity loan market rates.

That makes rates on home equity installment loans much cheaper than double-digit interest on credit cards, and unsecured personal loans, and particularly useful to consolidate high rate debt.

Currently HELOCs are cheapest to use for debt consolidation.

As of last week in June 2008, $50K HELOCs have a national average rate of 4.20%, $50K HELs carry a rate of 7.75% while the standard 30-year first mortgage has an average of 6.30%.

Remember that HELOCs are adjustable rate loans and their interest rate is likely to change during the repayment term. Also, for your particular circumstances - credit score and location - rates of home equity loans may vary greatly.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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