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Debt consolidation is when you take out a loan, usually tapping into the equity in your home, to pay off higher interest debt, usually credit card debt. Mortgage lenders make a lot of money on these types of loans, which is why they push them so hard. There are application fees and closing fees for debt consolidation loans. Plus, some lenders charge fees so you can get a lower interest rate. All that said, is a debt consolidation loan right for you? If you own your home and have significant equity in it, it could be. The benefits of tapping your home equity are that you can pay off your higher interest debt at considerably lower rates. Plus, some or all of the interest you pay on the loan could be tax-deductible. The drawback is that most home equity lines of credit or refinances extend the repayment period, so you may end up paying more for the debt in the long run. Plus, if you draw down the equity in your home and a true-blue emergency were to strike--say you lose your job or have a catastrophic medical emergency—you would not be able to fall back on your equity to bail you out. Finally, if you suspect you'll just turn around and run up the credit card balances again, don't touch your home equity. If you can't pay your bills, you could end up on the street.
|Jennifer Mathes, Ph.D.|