If your intention is to get back on track financially and become debt-free, then a home equity loan is a better option. A home equity loan is a fantastic option for consolidating debt as the rates are low when compared to other forms of debt.
Additionally, it is simple and helps in playing a vital role in your debt repayment strategy. The ideal use of a home equity loan is often for home renovations or to help you get through difficult circumstances. While there are several benefits, it is also imperative to understand the risks involved. Here’s what you need to know.
Should you use your home equity to consolidate debt?
A home equity loan is a fantastic alternative to utilize the built-up equity in your home to cash. Additionally, it is also an effective way to consolidate high-interest debt such as credit cards and personal loans. Because the loan is secured, the interest payment may be tax deductible. This type of loan is good for keeping on top of your expenses.
The danger with a home equity loan is if you happen to increase your debt load, your home will be foreclosed if you default on your repayments. You should do your diligence before deciding if a home equity loan is the best option to consolidate your debt.
If you want to apply for a debt consolidation mortgage in Ontario, contact the team at Mortgage Loan Ontario today for more details.
Benefits and Drawbacks of using a home equity loan to consolidate debt:
- Lower interest rates: When compared to other loan types, the interest rate on a home equity loan is low. It is because a home equity loan is a secured loan, which means you will offer collateral i.e., your home to the lender.
- Lower monthly payments: Because the repayment period is longer, your monthly payments will be lowered.
- Only one simple payment to make every month: Since all the high-interest debt is consolidated into one easy-to-make payment, you will end up making only one payment each month, ensuring you do not miss out on your repayments.
- Interest is tax-deductible: If you take out a home equity loan intending to make improvements, then the interest on the loan will be tax-free.
- You don’t need to have a good credit score: Because you are putting up your property as collateral to the lender, you present less risk to the lender and do not require a high credit score to qualify for the loan. However, it helps if you have a high credit score, as you can qualify for better interest rates.
- You could get your house seized: Since your house is used as collateral, if you default on your payments, your property could get foreclosed.
- The value of your property can decrease: If the value of your house decreases, you will end up owing more money than you should. In certain cases, you could be forced to forfeit your home to the bank.
- Additional fees: You might need to make additional expenses such as closing costs and appraisal costs.
- Not an immediate process: It usually takes 30 days or sometimes longer to get the paperwork for your home equity loan.
- Increases your debt load: One major drawback to a home equity loan is that you are adding to your debt loan. If you are an individual already riddled with debt, adding additional debt will impact your credit score and history.
Alternatives to using home equity for debt consolidation
There are plenty of alternatives to using a home equity loan for debt consolidation.
Other options include:
1. Personal loan
Personal loans can be used for about anything, including debt consolidation. If you can secure a personal loan with a low-interest rate, you can utilise the funds to pay off your high-interest debt. This will help you pay off your debt quickly and save more money on interest.
2. Balance transfer on credit cards
Sometimes credit card companies offer an introductory 0% interest period for balance transfers. If you have smaller repayments, you can use this option for consolidating debt.
3. Cash-out refinance
It is similar to a home equity loan, but the borrower takes a much larger loan to pay off the existing mortgage balance. This is a sought option for lenders as it involves less risk and the borrower does not need to take out a second mortgage.
4. Debt management plan
One of the best options to consolidate debt is to create a debt management plan that will identify the sources of your debt, including working on your repayments one at a time.
Schedule an appointment with Mortgage Loan Ontario today
If you have concluded that a home equity loan is the best solution to consolidate your debt, then start comparing various lenders for rates and terms. You can count on the team at Mortgage Loan Ontario for the above-mentioned.
If you are looking for the best rates and terms on a debt consolidation mortgage in Ontario or a home equity loan in Ontario, speak to our team today to schedule an appointment.
Looking to apply for a debt consolidation mortgage in Ontario? Call us today.