Consolidating mortgage home equity loan
You’re guaranteed a certain amount, which you receive in full at closing.“Home-equity loans are generally preferred for larger, more expensive goals such as remodeling, paying for higher education or even debt consolidation since the funds are received in one lump sum,” says Richard Airey, a loan officer with Finance of America Mortgage in Portland, Maine.
The amount a homeowner is allowed to borrow will be partially based on a combined loan-to-value (CLTV) ratio of 80% to 90% of the home’s appraised value.
Home equity loans exploded in popularity after the Tax Reform Act of 1986, as they provided a way for consumers to get around one of its main provisions—the elimination of deductions for the interest on most consumer purchases.
The Act left in place one big exception: interest in the service of residence-based debt.
Be aware that home-equity loans can carry risks, too.
The main problem with home-equity loans is that they can seem an all-too-easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending, and sinking deeper into debt.
That helps explain why the primary reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances.