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One of the biggest decisions many Americans face is how to deal with debt consolidation. And one of the ways quite a few people get out of debt is through a second mortgage debt consolidation. But is this really getting out of debt? And will it truly help you in the long run?

Secured debt v. unsecured debt

One of the first things to understand when taking care of debt consolidation is the difference between secured debt and unsecured debt. This will play a big role in whether or not using a home equity loan for debt consolidation is right for you.

Secured debt is that which is backed up by something. There is collateral on the loan. This means that you offer something up to assure the lender that the cash you borrow will be repaid. In the case of a car title loan, you provide the title of your car. If you fail to repay your loan, then the car is taken from you, and the lender sells it to help repay the debt. The same is true of a second mortgage (or a first home mortgage loan for that matter). The house secures the home loan, and if you default, the lender can take the house.

Unsecured debt is different. It is offered to you with no tangible assurances that you will pay it back. You are legally bound to do so, but the creditors or lenders do not have a “hard” asset to go after to force you to pay. In such cases, where debt is not secured by your home, creditors and lenders cannot take the house from you in order to recoup their money.

Securing unsecured debt

When getting out of debt, it is very tempting to use a home equity loan for debt consolidation. And in many cases it is easy to see why it would be desirable. The interest rate for the second mortgage is often lower than what you are paying on the unsecured debt, and you will find that is sometimes tax-deductible.

But what happens if you get in further trouble and can’t pay? When you take out a home equity loan for debt consolidation, you are taking unsecured debt and securing it with your home. This may result in you losing your house down the road, whereas if the debt had remained unsecured, your home would have been safe as long as you continued to make the mortgage payments.

Before deciding to use a second mortgage for debt consolidation, carefully consider your options. You may lose the house to your creditors.

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second mortgage, debt consolidation home equity, secured debt

One of the most popular methods of debt management is debt consolidation. And, in many cases, this consolidation is carried out through a loan. When you get a debt consolidation loan, you take out one large loan and then use that money to pay off your smaller debts. And one of the ways to get the largest amounts of money, with the lowest interest rates, is to turn to a home equity loan.

Home equity is basically how much ownership you have in your house. If you take the market value of your home and subtract what you owe on it, what is left is the amount of equity you have. If you have a $195,000 left to pay on a house that is worth $235,000, you have $40,000 of equity. If you take out a loan against your equity, then you can use that to pay off your debts.

Benefits of debt consolidation with a home equity loan

When you take your home equity loan, which is basically a second mortgage, you will find that the interest rate is lower. Additionally, the second mortgage interest you pay can also be tax-deductible in some cases. This can be a real benefit. Additionally, your debt management because simpler, since you only make one payment now, and have one lower interest rate.

Cons of debt consolidation with a home equity loan

It’s not always best to use a home equity loan second mortgage for debt consolidation, however. Remember: when you secure a loan with the equity in your home, you are putting your biggest asset at risk. If something happens and you are unable to make payments, you could lose your house. With unsecured debt, your home is safe, even if you declare bankruptcy.

Also, if you so not practice discipline in changing your spending habits, debt consolidation can make matters worse. An important part of debt management is to STOP the behaviors that put you into debt. If you do your debt consolidation with a home equity loan, it is vital that you do not build up any more credit card debt on those newly-paid-off cards.

Carefully consider your position before you decide to put your home on the line as part of debt management. There are other options and solutions, and you should consider which would be best for you.

There are many different ways to get out of debt, and several options to choose from. The most popular two, however, are debt consolidation and debt negotiation. There are subtle differences between the two, and it helps to explore them as you search for the best way for you to get out of debt.

Debt consolidation

If you use debt consolidation to get out of debt, you essentially put all your debts together and then pay them off, using one payment and one interest rate. One of the most common ways to do this is through a home equity loan, or a second home mortgage. You use the money from the refinance mortgage to pay off all of your debts. Then you have only one payment and (usually) one lower interest rate. And the home mortgage interest paid is usually tax-deductible in some way.

You do not always have to use a home mortgage to do your debt consolidation, however. It is possible for you to take out an unsecured debt consolidation loan to help pay off your smaller debts. And, you can even consolidate your debt through a company in such a way that you are not taking out a loan at all. Rather, you merely give in your account information to a certified debt consolidation company, and make your single payment to the company. The company then makes all of your smaller payments.

Debt negotiation

Debt negotiation is a different tack. It seems similar to debt consolidation, but it really is quite different. You contact a company and give in your debt information. Then you stop paying your creditors and make payments to the company. The company puts your money into an account to use for later. The company acts as your representative to your creditors, and begins working with them to settle your debt. When an agreement has been reached, the money from the account is used to pay the settlement. The negotiation company moves to the next creditor, engaging in the same negotiations.

It is important to note that when you enter either debt consolidation or debt negotiation that your credit score will take a hit. With debt consolidation, however, it is a smaller hit. With debt negotiation, your credit report will show that you have stopped paying your creditors (which you have).

These are not the only options to help you get out of debt. However, they are among the most popular, as they require the least amount of work from you.