While a debt consolidation loan may be the right decision for some consumers, it may lead other consumers to financial ruins. Home Equity Loans and Second Mortgages E verything mentioned above regarding debt consolidation loans apply here as well. In fact, debt consolidation loans are typically nothing more than home equity loans. A debt consolidation loan, however, need not be a home equity loan. A home equity loan and a second mortgage both use the equity in your home as collateral.
Interest is charged on the entire amount borrowed and monthly payments begin immediately.
Both types of loans typically require processing fees, an appraisal fee and possibly other costs. On the other hand, depending on many factors, including your credit worthiness and equity, the cost of processing the loan and resulting monthly payments might not provide you with any relief at all. Typically, lenders use a formula for determining eligibility and how much they will lend. Of course, after paying the processing fees and other costs, they may, in effect, only get a portion of this amount. The advantage of a second mortgage or a home equity loan is that the interest is tax deductible for tax payers itemizing deductions.