Home Equity Loan Dangers

Homeowners are constantly bombarded with advertisements tempting them to take out a second mortgage called a home equity loan. Home equity loans are increasingly popular among lenders not because they are beneficial for you, but because they earn lenders a lot of money. If you have considered using a home equity loan to pay off your unsecured debts - such as credit card debt - or to get cash, then you should understand the risks involved.

Home Equity Loans for Unsecured Debt

Amassing thousands of dollars in credit card debt is easy. Credit card companies are constantly raising credit limits and offering new incentives to increase your potential debt. But they often do this with a catch - an increased interest rate. After realizing your low introductory rate is now 25 percent or higher, you may look for a way to avoid paying those high interest rates. The promise of a low interest rate, like the one on your home loan, to consolidate and pay off your unsecured debt is extremely alluring.

The danger of adding an unsecured debt to a secured debt, like your home, is that now the loan is backed by collateral, which the lender can take if you miss your monthly payments. The benefit, a lower interest rate, is null and void if you lose your greatest financial asset. A foreclosure can mean not only the loss of your house, but can make purchasing another home nearly impossible. Even renting an apartment can be difficult with the foreclosure on your credit report.

Home Equity Loans for Quick Cash

Using a home equity loan to get fast cash will put you in jeopardy of becoming upside down on your loan, or owing more on your home than it is worth. If the home depreciates in value, then you will be left in a harsh financial situation. You could sell your home and still be responsible for the outstanding balance, or try to wait until the home increases in value. Waiting to sell could allow the value of your home to plummet and may not even be an option if you are prompted to move by unforeseen circumstances.

Another substantial downfall to a home equity loan is the potential for you to accrue more debt. Unless you change the behavior that caused the debt in the first place, you will likely begin purchasing items you cannot afford and repeat the cycle of debt. Every time you refinance your loan, fees and closing costs are, usually, rolled into the loan. This means that you are drastically increasing your debt every time you refinance and taking one more step toward foreclosure or bankruptcy.

A Better Option for Credit Card Debt

Home equity loans are a risky way to address your credit card debt. Debt consolidation is one debt-relief method homeowners have used to consolidate credit card debt.

For consumers who want to eliminate their debt, debt settlement may be the best solution. Debt settlement works with your creditors to reduce your credit card debt balance without risking your home.

If you suffer from overwhelming debt, then you need to research your debt-relief options and choose the program best suited to your needs before you rush into a home equity loan.

Author Bio: Scott Sumerford has several years of experience working in the financial industry and has written a myriad of articles on various financial matters. Read more about how MyUSADebt offers a viable alternative to debt consolidation.