The arguments for and against refinancing existing consumer debt into a home equity loan are readily made. There are fundamental differences between home equity loans and consumer debt. However, beyond the characteristics of each form of debt, there is an impact on borrower behavior that might be a strong argument in favor of refinancing.
So, What are the Pros and Cons of Refinancing?
The classic argument in favor of refinancing consumer debt with a home equity loan is that a home equity loan typically will carry a lower interest rate. On the other side of the ledger, the caution against refinancing consumer debt with a home equity loan is that the latter is a type of mortgage which involves putting your house up as collateral. A mortgage generally means raising the personal consequences of defaulting.
Want to Know the Advantage of a Home Equity Loan?
It is important not to treat the issue of mortgage collateral lightly, but there is an additional point about home equity loans that makes this type of refinancing a potentially constructive part of your debt management. If you’re one of many who struggle to keep a lid on debt, you may need to quit your credit cards cold turkey. You can retain a debit card for convenience purposes, but you shouldn’t carry around the potential to increase debt in your wallet every day.
The good thing about a home equity loan is that you do not carry a loan officer around in your wallet either. This kind of borrowing is more formally defined–you go through an application process for a specified amount and it will take a conscious effort to increase your debt beyond that. Thus, home equity debt is less prone to increase through impulse and can be your key debt management tool.
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