Best Way Out Of Debt - Debt Consolidation?

Debt consolidation loans are usually in the form of a second mortgage. The equity that has been accumulated in a home is used as collateral to get a second mortgage, and the proceeds from that second mortgage is used to pay off debts, many of which are unsecured debts.

I am neither advocating nor panning debt consolidation loans here. But before you get a debt consolidation loan in order to alleviate your financial woes, you do need to fully understand what you are doing, why you are doing it, what the cost could be, and if it will, in fact, solve your debt elimination problems.

Home equity is usually the biggest asset many families have, if not the only asset. Equity is made up of the down payment that was made when the home was purchased, the amount of the principle of the loan that has been paid off, and any increase in the value of the home over the years.

Home loans, including second mortgages, are secured debt. The home is the collateral for the loan. If you miss your mortgage payments and go into default, you will lose your home. That's the way it works.  And instead of having debt elimination, you have no home!

When you consolidate your bills into a debt consolidation loan with a second mortgage, you are risking losing your house in the event you default on your mortgage. There is more. Unsecured debt is debt for which you have not pledged any collateral -- think credit card debt. When you charge a purchase to a credit card, you have not used any of your assets as collateral for that loan. And credit card purchases ARE loans. When you use a second mortgage to pay off your credit cards, you are making your unsecured debt secured which is bad.