Types of Services
The first point to understand regarding debt consolidation is that there are a variety of services available to deal with bad credit debt. You as the debt holder need to decide what service works best for your needs.
The first approach for bad credit consolidation is to fold the consumer debt (i.e. your credit card balances) into a bigger secured debt. This is commonly done via what is called a 2nd mortgage or equity loan. If you own a house, and have sufficient equity built up (ownership), then you can borrow against it to pay off consumer debt, thereby folding those balances into your home borrowing. The home approach can be done via one of two methods: either refinance the existing mortgage, or take out a 2nd mortgage against the existing equity. Either way, the home is the collateral against the added debt. This approach’s benefits include usually a lower interest rate or a longer payment period. Plus, anything associated with borrowing against real estate is tax deductible against your income taxes for the interest paid.
The risk of using your home to consolidate secured debt, however, comes with a very dangerous price. Normally, a first mortgage falls under what is called a homestead act. Most states have one, which basically protects a homeowner from losing their home due to debt. However, when you take out a 2nd mortgage, most lenders make sure to include in the paperwork a waiver that if accepted by you, agrees the house can be used to pay off the debt. Thus, if you fail to make your payments, the homestead act protection will not help you. You gave up the rights when you added on the unsecured debt.
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