Home Equity Debt Consolidation
Understanding some terminologies in the field of loans and finance can be really difficult,
especially, when it comes to debt consolidation loans or home equity. Hence, I have made an honest and sincere
attempt to put forth before you a small yet comprehensible elaboration of home equity loans and their debt
consolidation loans. Hence, let us not get confused by complex terminologies and incomprehensible language.
What is a Home Equity Loan?
Home loans and mortgages are basically borrowed by common consumers, so that they can buy good homes and
properties. Now, what is the exact procedure that comes into play when you buy a home, with help of a mortgage loan
or a home loan? Suppose you buy a property that is worth say USD 100,000. In such a case, the lender is never going
to lend you the entire amount of USD 100,000. The lender will pay you USD 80,000, and you will have to pay USD
20,000, out of your own pocket. The amount, USD 20,000 is termed as a down payment. In rare cases, if the borrower
has exceptionally good credit report, then the lender might (read again: in rare cases) lend out the entire amount
of USD 100,000. Thus, when you take up your loan, you pledge the house as a collateral with the lender and you will
be left with an equity of USD 20,000. After say 5 years, the market value of your home soars from USD 100,000 to
USD 130,000. Thus you are left with an equity of USD 50,000. You can use this equity to borrow any other secured
loan. Thus, the total calculation goes as follows.
|Initial Market Value = USD 100,000
Total Home Loan Amount = USD 80,000
Total Down Payment = USD 20,000 (paid out of your pocket)
Therefore, initial home equity,
Initial Total Market Value - Total Home Loan Amount = USD 100,000 - USD 80,000 = USD 20,000
New Market Value = USD 130,000
Total Home Loan Amount = USD 80,000 (though partly repaid, the collateral remains the same)
Therefore, new home equity,
New Market Value - Total Home Loan Amount = USD 130,000 - USD 80,000 = USD 50,000
On the basis of the remaining USD 50,000, the home owner can easily borrow another loan. In most cases, people
prefer to borrow educational or student loans with the help of this equity. People also prefer to borrow home
improvement loans with the help if this equity.
Home Equity Debt Consolidation
It so happens that people tend to fall on financially difficult times after they have availed the home equity
loans. In such a situation, people can avail consolidation loans. In such a loan, the borrower can club together
more than one loan, and can have a long time repayment period and also a reduced rate of interest. There are also
many different bad credit consolidation loans, that one can borrow in cases of poor credit ratings. Such loans can
be used to consolidate loans such as auto loans, mortgages, educational loans, etc. These loans are basically
secured loans and the lien is held by lender of the loan. A prolonged period of time and a low rate of interest are
two important features of this loan. It is advisable that you calculate a debt to income ratio before you borrow a
debt consolidation for home equity loan, as every late payment painfully reduces your credit rating and shows up on
your credit report. On the other hand, you can also use this loan, to improve your credit rating, as every timely
payment of the loan tends to improve the credit report.
Article Source and Author: Scholasticus K