Debt relief programs now come a dime a dozen. As more people experience issues with managing their debt, the popularity of programs has surged. Although many professional companies are available to assist consumers, it is important that individuals seeking help understand their options. Two common debt consolidation options for homeowners include cash out refinancing and home equity loans.
Understanding How Cash Out Refinancing Works
Cash out refinancing is a popular method amongst individuals desiring to consolidate their debt and ease their financial burden. The process involves homeowners borrowing money against the equity in their home to pay off unsecured debt. The way it works exactly is that the homeowner refinances their loan for more than the current balance of the mortgage and keeps the difference. The homeowner typically pays closing cost with cash out refinancing. The cash out refinancing replaces the homeowner’s original loan, and the interest rate on the new loan is typically lower than the previous loan’s interest rate.
Benefits of Cash Out Refinancing
• Cash out refinancing does not add to a consumer’s debt but simply restructures it
• Consumers enjoy a fixed payment plan and a single loan payment
• Allows consumers to become debt-free
• Consumers pay a lot less in interest
The Basics of a Home Equity Loan
A home equity loan differs slightly from cash out refinancing because a home equity loan is an additional loan that does not replace the original loan. In most cases, homeowners are not required to pay closing cost on home equity loans. A home equity loan is especially attractive to individuals wanting to consolidate their debt but do not have great credit scores. Many lenders relax their credit requirements for homeowners because the home serves as collateral, which means that the lender considers the loan less risky. For consumers who value their homes, they are likely to make the payments on their home equity loan.
Benefits of a Home Equity Loan
• Qualifications are easier for individuals with bad credit
• Multiple high-interest debts are replaced by a single debt with a lower interest rate
• Homeowners can typically borrow large sums of money
Legitimate debt relief programs can help owners further understand their consolidation options through free credit counseling sessions. The best option chosen by consumers will depend on their personal financial situation. Not all companies offering debt relief assistance are the same, so it is imperative to review the history of a company before agreeing to work with them.