Consolidating Debt Into a Home Equity Loan or Second Mortgage
High interest debt got you worried? Think about consolidating those high interest credit cards and other bills into a home equity loan, also known as a second mortgage. When you finance your debt with a secure loan, like a home equity loan, you qualify for much lower interest rates. In early 2007, rates for a home equity line of credit hovered around 8%.
Home Equity Loan Or Second Mortgage?
Home equity loans and second mortgages are two different types of loan products that tap into your home's equity. A home equity loan, or HELOC, has a line of credit that you can draw from and adjustable rate. These rates are tied to the prime rate and can change daily or monthly, depending on your loan contract. They also have shorter terms, usually 5 years. After that, you have to make a balloon payment or covert to a fixed term loan.
Rates and Terms
Second mortgages can have fixed or adjustable rates. Adjustable rate second mortgages change less often that HELOC loans, usually monthly or quarterly. Their terms are also flexible, so you can choose 5, 10, or 30 years to pay back your loan. Both types of loans' interest can be deducted from your taxes if you qualify.
Which Consolidation Loan Is Cheaper?
A consolidation loan can be cheap either with a low monthly payment or low interest payments. For the lowest monthly payment, a second mortgage is your best bet with its extended loan terms. But for the cheapest overall loan, a home equity loan is your best choice. With few fees and a short term, you can quickly pay off your debt and limit your interest payments.
But there is a wide variation in what lenders charge for both home equity loans and second mortgages. Rates can vary by several percentage points. Fees can also differ by hundreds, even thousands of dollars with a large loan.
The only way to determine who has the best loan for you is to ask for loan quotes from a number of different lenders.
