Before considering a home equity loan as a form of debt management, it would be wise to first acquire an understanding of what this type of borrowing involves. You are probably more familiar with the term "second mortgage", and that is precisely what a home equity loan is. Be aware though, that there are different types of home equity loans that can be used in consolidating debt. In this article we'll outline the various options that borrowers have if considering home equity, and how effective they may be for debt management.

Two Types of Home Equity Debt Management Options

There are two different types of home equity loan available to borrowers; "lines of credit" and "closed end" or "term" loans. These loan options are both basically second mortgages on your home, however both run for a shorter time than your original mortgage would have. For example, if your initial mortgage was for 25 or 30 years, a home equity loan must normally be paid back within a five to fifteen year period. Let's take a closer look at these two potential forms of debt management.

Term Home Equity Loans and Debt Management

The initial stage of applying for a home equity loan will involve having an appraiser determine the current value of your house and property. If after the assessment it is determined that the value of your house exceeds that which you owe on your mortgage, it is possible that you may qualify to secure a home equity loan. I say possible because lenders normally require a healthy credit history in addition to the positive value of your home. If you do qualify, your loan will be paid to you as a lump sum payment which you will be expected to pay off within a set period of time at a fixed interest rate. Make sure that before accepting the loan you will be able to make the monthly payments, as you will not be able to borrow further on the loan, and if defaulting you could lose your home.

Lines of Credit and Debt Management

A line of credit works much like a credit card does; you can borrow money up to a limit set by the lender. For instance; if you were to receive a line of credit for $10,000, then borrowed $5,000 from your "account", you would then have $5,000 of credit left. As a debt management tool however, a line of credit may not be so effective. For one thing they have a variable interest rate that can change over the course of time. This could work to your advantage if interest rates go down, but if they soar, you run the risk of more debt. Upon qualification for a line of credit you may receive either a credit card specifically for your loan, or be written a check. Whichever vehicle the lender decides to use to issue your loan, you may be required to withdraw a minimum sum for each transaction, and/or be asked to maintain a minimum balance.

Which Can Help You to Better Manage Debt?

Because personal scenarios may differ, there is no clear cut choice as to which option offers better debt management power. There are though some scenarios that make it obvious which would be the wiser choice.

If you have immediate needs of cash, say $20,000, and don't plan to borrow any further in the foreseeable future, a home equity loan is probably the best choice. You will pay a fixed rate over a definite period of time. This makes budgeting for the loan and subsequent payments, and consequently debt management, much easier.

If though you require money over an extended period of time, for example to pay for a child's schooling over a four year period, a line of credit may be a more effective debt management tool. Lines of credit allow you to borrow the money you need, only when you need it. If the sums of money you borrow are relatively small, and you pay the principle back fast, lines of credit can end up costing less than home equity loans.

Your personal circumstances will best determine the most effective form of debt management for you. If you are in doubt, even after researching all of your options, it may be wise to consult with a professional debt management advisor.