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10 Tips to Better Debt Consolidation

6. Use Home Equity—Loan or Line of Credit

A home equity loan or line of credit (HELOC) can be used to consolidate and payoff debt. This differs from a mortgage refinance in one important way. A loan or HELOC essentially uses the equity in the home and the home itself as a guarantee to the lender. The new loan can be used to consolidate and payoff debt, but the existing mortgage still stands. Much like an auto loan, secured by the auto itself, a home equity loan or home equity line of credit is backed by the home and any built up equity.

Home Equity Loan vs. Home Equity Line of Credit

A home equity loan is a separate loan, secured by the equity in the home. The current mortgage does not change, nor do the regular mortgage payments.

A home equity line of credit, also referred to as HELOC is a bit like having a credit card tied to the equity in the home. It may be open ended so that the borrower can use the credit to payoff balances, or for purchases up to a preapproved amount.

Both a home equity loan and a home equity line of credit can be used to consolidate loans or credit card balances. By making just one monthly payment, bill consolidation is made easier. If an individual defaults on either account however, the home equity lender can force foreclosure, once the primary mortgage lien is satisfied.

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