Consolidating consumer debt is a viable way to go if you are in the process of trying to eliminate debt. However, be aware of the many pitfalls that can come with a no equity debt consolidation loan. At at high level, this type of loan allows you to borrow up to 125% of the appraised value of your home. A few years back, many people got caught up in this loan product and today are in bad shape due to the fluctuations of the housing market. So, consider the risks before choosing this type of loan.
To start, there are some costs and fees to be aware of. Due to the high risk nature of this loan, you can expect to pay a higher interest rate than other consolidation loans due to the simple fact that you are borrowing more money than your house is worth. Also, you may have to pay private mortgage insurance since you will not have the customary 20% equity in you home any longer which obviously drives up the cost.
Another point to consider is the tax consequences of a no equity consolidation loan. Many people have grown to like the fact that the interest on their home equity loan is, up to a certain point, tax deductible. Unfortunately, the tax code is a little different for these loans. The interest that you will pay over the course of the year are typically not deductible on your tax bill. It goes without saying that you will want to consult a professional tax person who can give you definitive advice on this matter.
In closing, the potential for high interest rates and high costs as well as tax disadvantages make this loan too risky for the common home owner. As we’ve seen, home values do fluctuate and can even go down in value. The last thing that you want to have happen is for you to be upside in your house and not be able to sell. Lastly, consult professionals who specialize in these loans before committing to any contract.