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Home equity is the difference between the market value of your residential property and the mortgage amount that you continue to owe. Home equity loans allow you to borrow additional money, using your residential property as collateral. It is not necessary for the home mortgage to have been paid off completely to obtain a home equity loan. In other words, home equity debt is a second mortgage. It allows you to turn the unencumbered value of your home into cash, which could then be spent on debt consolidation, home improvements or any other expenses.

There are two kinds of home equity debt. The first kind is called a home equity loan and the other kind is called home equity lines of credit, or HELOCs. In a home equity loan, you receive a one-time lump sum that is to be paid off over a specific amount of time. The rate and the monthly installment amount remains the same until the end of the term. Once the money for a home equity loan has been received, you cannot borrow any further amount using your home as collateral.

Home equity lines of credit works more like a credit card. You are assigned a loan limit based on your home equity for a period of time that is set by the lender. During this period, you can withdraw funds as per your requirement anytime, within the overall loan limit assigned to you. You can choose to repay the principal with interest or the interest alone. If you repay the entire principal or part of the principal, you can use the credit again, just like a credit card. The interest rate on home equity lines of credit is a variable that fluctuates through the loan period.

A typical home equity line of credit is split into the draw period and the repayment period. During the draw period you can draw credit and the monthly payments can cover only the minimum interest costs, if you so desire. During the repayment period, you are not allowed to draw further credit and your monthly payments must include repayment of the principal along with the interest.

Interest rates on home equity loans and home equity lines of credit are pegged a little higher than normal mortgage rates. The repayment period for home equity loans and HELOCs is usually shorter than the original mortgage, with a typical repayment period being 15 years.

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Getting a home equity loan, or second mortgage, for the sole intent of
consolidating and ultimately eliminating unnecessary debts is a great
plan. Many consumers are burdened with high credit card balances,
consumer loans, etc. Reducing or paying off debts takes time. Furthermore,
many do not have the disposable income to lessen credit card balances.

Owning a home places you at a huge advantage. Those who have built
equity in their homes may acquire a home equity loan as a way to reduce
debts. These loans are affordable, and serve a useful purpose. However,
debt consolidation home equity loans have certain risks.

How Do Debt Consolidation Home Equity Loans Work?

The concept of debt consolidation home equity loans is simple. Home
equity loans are approved based on your homes equity. A homes equity can
be calculated by subtracting the amount owed from the homes market
value. Hence, if you owe $50,000 on a home worth $120,000, the equity
totals $70,000.

Once the lending institution approves your loan request, and the money
received, the funds are used to payoff creditors. Creditors may include
high interest credit card balances, consumer loans, automobile loans,
student loans, etc. Furthermore, debt consolidation can used to payoff
past due utility bills and medical bills.

Debt consolidation loans are not free money. These loans have to be
repaid within a reasonable timeframe. On average, home equity loans have
short terms of seven, ten, or fifteen years sometimes less. Because
home equity loans have fixed and lower rates, these loans are easier to
payoff than credit cards.

Pros and Cons of Debt Consolidation Home Equity Loans

The major advantage of home equity loans is the ability to become debt
free. However, home equity loans involve careful planning. Once credit
cards and other loan balances are eliminated, closing credit accounts
is a smart maneuver. This way, you avoid accumulating additional debts.

Sadly, some consumers repeat past credit mistakes. Along with paying a
home equity loan, they acquire more credit card debt, which increasing
their debts and payments. Excessive debt makes it difficult or
impossible to maintain regular home equity loan payments. This will present
another home equity loan danger inability to repay the loan. A huge
disadvantage of debt consolidation home equity loans involves the risk of
losing your home. Before accepting a loan, realistically analyze whether
you can afford a second mortgage.

View our recommended lenders for Home Equity Online Loans.