Understanding the Home Owner Debt Consolidation Loan Process

Consumers with overwhelming debt may benefit from a debt consolidation loan. Such a loan means making a single payment rather than writing check after check. Debt management may begin with a consolidation loan. It is possible to consolidate debts for non-homeowners, as well. However, this would be considered an unsecured debt and would carry a higher interest rate. The approval process for an unsecured debt consolidation is much simpler for a homeowner. The approval process for unsecured loans depends much more on credit history and credit scores than for real estate secured loans.

Benefits

For a homeowner, a debt consolidation loan is secured by the borrower’s home. Because these loans are considered a secured debt, they offer lower interest rates than unsecured debt like personal lines of credit and credit cards. It is possible to use such a loan to lower one’s overall monthly payments.

Disadvantages

When a consumer defaults on an unsecured debt, their credit score is damaged. This makes obtaining credit in the future difficult. When a consumer defaults on a secured debt, the property securing the debt is repossessed by the lender. In this case it means losing one’s home. Because other debts are added to the amount owed on the home, this raises the monthly mortgage payments. This eliminates the option of making a mortgage payment while allowing unsecured debts to go unpaid in times of economic hardship.

Home loans should be the top priority for any homeowner, so if there is a strong possibility of defaulting on such a loan it should not be considered as an option. Offered for 10 to 30 year terms, it is recommended to obtain the shortest term that you can afford for the debt consolidation loan. Even though a longer term loan offers lower monthly payments the interest over the life of the loan will cost a great deal more for longer terms.

Poor Credit

It is possible to obtain a debt consolidation loan even with less than perfect credit. Credit scores do affect interest rates, though. The higher the credit score, the lower the interest rate, generally speaking. If is best to get debts as under control as possible before applying for any sort of loan, and a consolidation is no exception. Paying credit card balances down and making payments on time can raise credit scores enough to make a difference in the interest rate offered by the bank. This is not always possible, however. Because a debt consolidation loan appeals to those who are already overwhelmed with their financial situation, it may not be feasible to get balances low enough to make a difference. It may not even be possible to get every bill paid by its due date. If that is the case, then the homeowner should at least make certain that the current mortgage is paid on time every time. Even if other debts are paid late, this will show lenders that the home is the borrower’s top priority, demonstrating a level of responsibility and making the lender more likely to extend the credit requested.

Getting Started

The consolidation process does take time, so homeowners who have decided that a debt consolidation loan is right for them, should begin the process before their financial situation gets any worse. The first step is to choose a lender. There are many lending institutions to choose from, and terms and conditions may vary greatly from one to the next. It is vital to understand the interest rate and other terms of each possible loan before committing to one. Talking with loan officer or financial advisor at a local bank branch or a regional mortgage lender is a good place to get started.