Q: Can I consolidate my bills with a consolidation loan or a home equity line of credit?

A: Yes you can. However, you need to be cautious when consolidating "unsecured" debts, like credit cards, into "secured" debts, which both home equity loans and home equity lines of credit qualify as.

First, you need to understand the difference between a home equity loan and a home equity line of credit. It's quite simple, actually. A home equity loan is exactly what it sounds like -- it's a secured loan against the equity of your home. For example, if you owned a home worth $250,000 and you owed only $125,000 on it, you may be eligible for a home equity loan for as much as $125,000. If you applied for and received such a loan, you would actually receive a check for $125,000 (less any fees).

A home equity line of credit (HELOC) isn't really a loan -- it's more like a credit card. Given the same case as above, you wouldn't receive a check for $125k, but a "line of credit" equal to that. The advantage here is that you are only paying monthly interest and principal charges on the amount you spend from your line of credit, not the full $125,000.

Regardless, the danger here is that if you're unable to pay your home equity loan payments or your HELOC, your house is in danger. Home equity loans, after all, are commonly referred to as "second mortgages," and just like if you don't pay on your first, your home can be foreclosed upon and sold by your lender. The same applies for HELOCs.

Therefore, it is somewhat risky to consolidate $50,000 of credit card debt into a home equity loan or HELOC. As credit card debt, the debt is "unsecured." If you can't pay it, your house is not at risk because most states have homestead exemptions that make it impossible for creditors to force the sale of all but the most expensive homes (think mansions). While a home equity loan or a HELOC might be the right choice for you -- knocking double digits off your annual percentage rate of interest -- you must be cautious and fully cognizant of all the risks.

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Please Note: Unsecured debts are debts such as credit cards, personal loans, lines of credit, store cards, medical bills, and utility bills that are not secured by collateral. Mortgages and car loans are NOT considered unsecured debt.
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