Homeowners have more choices for debt help than most people. In the eyes of lenders, homeowners are highly valued. After all, they have the financial ability to purchase a house, a person’s largest investment. However, homeowners sometimes run into financial problems for a variety of reasons and seek debt relief. Money woes may involve the following situations:
- Job loss
- Substantial credit card debt
- Large medical bills
If you own a home and are facing some money problems, it is extremely important to choose the debt relief option that best fits you. While there are a lot of options for homeowners to get out of debt, some can leave you in financial ruin.
Home Equity Line of Credit
Homeowners have long turned to the home equity line of credit (HELOC) to help fix their financial problems. Basically, homeowners can borrow against the value of their home to get a low-cost debt consolidation loan. A borrower with a house can access a substantial amount of money through this method, in which their house is collateral for the loan. These offer the best interest rates out of all secured loans.
Home equity lines of credit have the lowest rates of delinquencies, according to American Bankers Association. A recent U.S. Census bureau study stated that borrowers with home equity lines of credit were older and wealthier than other mortgage holders. However, a recent softening of the U.S. housing market means, overall, homes have lost their value. This means homeowners get less money for a home equity loan than in years past. A homeowner who defaults on a home equity loan can lose the house.
Although it is rare, you could lose your home if you file for bankruptcy. Under Chapter 7 bankruptcy, you must sell assets to satisfy your debts. Federal law allows you to keep property from being seized by claiming them as exempt. Nevertheless, in some cases, homes are taken and sold to satisfy debts.
If you file for Chapter 13 bankruptcy, you must enter a repayment plan to settle your debts. The strict repayment plan may not leave you with enough money to pay your mortgage. Plus, all forms of bankruptcy involve extra attorney fees and filing fees, making it a cumbersome and expensive process to settle debt.
Debt consolidation combines all sorts of debt, such as auto loan debt, credit card debt and student loan debt, into one payment. Unlike a home equity line of credit, a straight debt consolidation loan is unsecured and has a higher interest rate than a HELOC. Despite the extra interest costs, this method of debt relief doesn’t risk your home and can help organize your debts. Be aware though – debt consolidation only organizes debt, it does not reduce it; with this method you still face years of payments. An alternative to debt consolidation – sometimes called debt settlement – offers a negotiated reduction of your debt balance.