Does high interest debt have you worried? Consider consolidating those high-interest credit cards and other bills into a home equity loan, also known as a second mortgage. When you finance your debt with a secure loan, such as a home equity loan, you qualify for much lower interest rates. In early 2007, rates on a home equity line of credit hovered around 8%.

Home equity loan or second mortgage?

Home equity loans and second mortgages are two different types of loan products that take advantage of home equity. A home equity loan, or HELOC, has a line of credit you can draw from and an adjustable rate. These rates are linked to the prime rate and may change daily or monthly, depending on your loan agreement. They also have shorter terms, usually 5 years. After that, you must either make a balloon payment or cover a term loan.

Rates and Terms

Second mortgages can have fixed or adjustable rates. Adjustable rate second mortgages change less frequently than HELOC loans, usually monthly or quarterly. Its terms are also flexible, so you can choose 5, 10, or 30 years to repay your loan. The interest on both types of loans can be deducted from your taxes if you qualify.

What consolidation loan is cheaper?

A consolidation loan can be cheap, with either a low monthly payment or low interest payments. For the lowest monthly payment, a second mortgage is your best option with its extended loan terms. But for the cheapest overall loan, a home equity loan is your best bet. With few fees and a short term, you can quickly pay off your debt and limit your interest payments.

But there is a wide variation in what lenders charge for both home equity loans and second mortgages. Rates can vary by several percentage points. Rates can also differ by hundreds, even thousands of dollars with a large loan.

The only way to determine who has the best loan for you is to ask several different lenders for loan quotes.