The interest rate during the draw period is typically variable, becoming fixed for repayment. However, a HELOC presents some degree of risk for the borrower, beyond the fact of using the home as securing collateral.Ī HELOC has draw period where the borrower can spend up to their credit limit, followed by a repayment period. The same study pointed to debt consolidation as one of the main uses for a HELOC, a fact supported by other consumer reports. TransUnion recently reported that HELOCs are on the rise as a popular home equity tool, with over 2/3 of current homeowners able to secure one. Through consolidation of these bills, most consumers can save money, and often pay-off the debts more quickly. They may also hold small loans, car payments, medical bills and other monthly obligations that spread-out their payments to multiple lenders. It is common for consumers to have some amount of credit card debt spread out over different providers. This article will focus on why it is often smart to use a home equity loan for debt consolidation, opposed to the more popular HELOC, or a cash-out refinancing. Though the specific uses of these products may overlap for consumers, there are smart ways to use each, based on their structure, costs and disbursements. They will tend to have different terms and rates, allowing consumers to choose the best fit for their unique needs and situation. Each will offer the borrower money to be used at their discretion. Loan TypeĮach product uses the home as collateral. The first mortgage has a senior position in the capital structure, but if you default on either loan you could still lose the house.Ī HELOC is similar to a home equity loan in terms of working alongside your existing first mortgage, but it acts more like a credit card, with a draw period, and a repayment period and is one of the more popular options with today’s homeowners.Įach option can be strategic, depending on your own circumstances – so understanding more about why you’d choose one over the other can help you to focus your research. This can be viewed most simply as one loan replacing another.Ī home equity loan, is a lump sum payment as well, but it does not include your mortgage payment – it is in addition to your mortgage, so is sometimes referred to as a second mortgage. A cash-out refinance, is really a refinancing of your existing mortgage with an additional lump sum added in, to be spent as you see fit.
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