First though, what is debt consolidation? Simply put, it's the process of combining all your debts into one. If you have ten debts of $10,000 each, then you have a total debt of $100,000. Some of those debts however, might be generating an additional 10% interest, while others are generating 15%-20% interest. In other words: Some of your debt is more expensive than others.
This is where debt consolidation comes into play. In theory, you'd take out a loan for $100,000 at a reasonable - or hopefully low - interest rate. Then you'd use those funds to pay off all ten of the smaller debts. This leaves you with just one payment to make each month, and one interest rate to manage.
Consolidating debt can be done with debt consolidation loans, by transferring your debt to zero or low interest credit cards, and by taking out a home equity loan.
Using the equity of your home to pay off debts can be risky, because if you default on the new loan, you could lose your home.
Likewise, using zero interest credit cards could also be problematic in the future, because these offers are usually designed to lure you in. The zero interest doesn't last.
Debt consolidation loans might be helpful, but be aware that when you have debt problems to begin with, you might not qualify for low enough interest rates. So if you choose to go this route, be sure to do all the math: Figure out whether the consolidation loan actually will reduce your overall payments - including the total interest you'll be paying for the life of your loan.
Some credit and debt counselors feel debt consolidation of any kind is a bad move to make though. In fact, it's estimated that 70% of americans who take out some sort of loan to consolidate their debt end up with the same or worse debt problems within two years.
A better, more long-term solution might be to consider using a debt counselor. Professional counselors negotiate with your creditors to lower your payments or interest rates, while at the same time coaching you to manage debt more effectively. The unfortunate side effect of using counselors though? Your credit report will take a hit because you're not technically paying your bills as originally agreed.
So there you have a general overview of debt consolidation, the common solutions and options, along with pros and cons of each. Be sure to research all your options completely before making a decision of course, because you don't want to make your debt problems worse in the long run.
Is Technology Good Or Bad
With all of the home foreclosures taking place across the country, many people may feel that it is not a good time to refinance. This is actually not true. Lenders want to keep people in their homes because of the expenses they incur when they try to sell a foreclosed home. Most times, they will actually take a bit of a loss. If you are considering refinancing for a better rate or to clean up any outstanding debts, there are many reasons why this is a good time to refinance your mortgage.
Mortgage refinancing is when you take a second mortgage to pay off the first mortgage and possibly consolidate debt under one loan. Like the first mortgage, it is secured against your home. Today, because of the current market conditions, lenders are offering interest rates at record lows. A record low rate could reduce your monthly mortgage payments by hundreds of dollars. As well, a fixed interest rate will not be affected by any down turns in the economy.
Another benefit of refinancing your mortgage is President Obama's mortgage refinance stimulus plan. His plan has allowed millions of mortgage owners the opportunity to refinance their mortgage at a low fixed rate in order to get out of financial hardship caused by the housing crisis and a decline in the economy. If you are having trouble paying your current mortgage or you are seeking to refinance for a better rate, President Obama's plan may be the solution for you.
Highlights of the Homeowner eligibility requirements as outlined in the President's "Home Affordability Plan" include:
- The house that will be refinanced must be the principal residence.
- The amount remaining on the mortgage must be for less than $729,500
- Income must be verified through tax returns or pay stubs.
- Homeowners must provide a handwritten and signed letter of "Financial Hardship"
- The mortgage loan must be through Fannie Mae or Freddie Mac
- If monthly debts exceed 55% of the homeowner's gross monthly income, the homeowner must get credit counseling
There have been special incentives that President Obama's government has provided all lenders for performing loan modifications on existing home loans. Banks and mortgage lenders can now offer the following highlighted benefits as outlined in President Obama's "Home Affordability Plan:"
- The bank or mortgage lender can lower monthly mortgage payment to 31% of one's gross monthly income.
- Home interest rates can go as low as 2% in order to meet the Obama plan guidelines. The 2% and 4.5% mortgage interest rates are adjustable after a 5 year period
- Home loan modification fees will be paid by the Government as part of the Home Affordability Plan.
- Incentive plans are available to reduce the homeowner's principal over 5 years, up to a maximum of $5,000.
Mortgage refinancing has always been a popular method of getting better rates and consolidating debt. According to the Mortgage Bankers Association, "the average interest rate on a 30-year mortgage in April was 4.76 per cent." Because of President Obama's new mortgage refinance stimulus plan, as well as lenders offering record low interest rates, this is a great time for you to refinance. It could save you hundreds of dollars a month.
Both Kathy Burns-millyard & Amy Nutt are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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