Many mortgage companies will tell you that a consolidation loan is a great idea for taking paying off your debts. Here this option is examined in more detail and compared with the debt settlement option.

When you get a consolidation loan several things happen. First the equity in your home gets “cashed out” meaning the homeowner now owes that much more on their home than they did before. It is that much more than before because of closing costs and other fees that get rolled into the loan. The homeowner would typically have an additional debt to pay (second mortgage) or at least have a significantly higher monthly payment than he did before. This may be cost effective depending on what rates of interest were being changed on the debts and is being charged on the mortgage. If the numbers work really well then in some cases debt consolidation can be a good thing.

What also happens is that previously unsecured debts such as credit cards are replaced by new secured debt. That means that previous credit card debt that had no security now is secured by the homeowner’s home! How many people would take out a credit card if they knew that if they didn’t pay then their house can be seized? How many people think that getting a lien on one’s property is not a bad thing? Well, believe it or not, securing unsecured debt is effectively a person paying to have a lien placed on their home. Also with unsecured debt there is hope of bankrupting the debt if all goes wrong but with a “consolidation loan” the only way to escape the new debt is to foreclose/surrender one’s house if payments can’t be made.

Instead of considering a debt consolidation loan one might also consider debt settlement. Debt settlement does not require the securing of unsecured debt. Also, instead of paying the whole debt (plus closing costs) the client pays a fraction of the debt over time. The monthly payments are much more affordable. The only downside is that credit can be affected negatively by this program, however for many people that sacrifice is better than paying tens of thousands of dollars more to pursue other options.