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 comprehensive elaboration of home equity debt consolidation loans.
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 ( 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
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 in 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 would reduce your credit rating, and would also show 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. As a signing off advise, let me comment that calculate before you borrow, and think twice before you make a late payment.