The goal of debt consolidation is to pay off your current debt with a new, lower rate loan. The lower your rates, the more of a savings your pocketbook will see each month. But loan fees can eat into those savings.
Extending your loan term can also lower your monthly payments. But your interest costs will be higher over the life of the loan than if you choose a shorter term.
For debt consolidation to be most affective, plan on paying off and closing accounts as soon as your receive your loan amount. That way you won't be paying interest on two account or be tempted to use your credit.
Refinancing Your Mortgage For Debt Consolidation
Refinancing your mortgage to cash-out your equity for debt consolidation purposes will qualify you for lower rates than a home equity loan. Having one mortgage is seen as less risky by lenders than by having two loans.
But you also have to consider overall rates. If you currently have a low rate mortgage, then refinancing for a slightly higher rate doesn't make sense.
For example, if you have a $200,000 mortgage at 5% for 30 years, your interest costs $186,513.24. Say you refinance for an additional $10.000, but now your rate jumps to 6%. Your interest costs jumps to $231,677.04 ? an increase over $45,000. It would have been better to go with a home equity loan.
Using A Home Equity Loan
A home equity loan allows you to use your equity without affecting your current mortgage rate. In some cases, it can also protect you from having to provide private mortgage insurance, an additional cost.
However, home equity loans, also known as second mortgages, have higher rates than if you refinance your mortgage. This is only an issue if you have a high rate mortgage. In this case, the better choice is to combine the cash-out with a refinance.
In the end, you need to compare numbers to find what is your best option. Luckily, lenders offer free online quotes to make this easy.
Firstly, what is a home equity loan?
The general idea is easy, you acquire a line of credit, secured through the equity in your home, that has accumulated over time from regular monthly repayments on the original home loan and from any increase in the properties worth, a range of homeowners may take out a HELOC (Home Equity Line of Credit), as they are known in order to utilize the cash for the intended purpose of financing home improvements, this purpose gave the loan its original name, however because of tax implications and other issues, the HELOC evolved to serve other needs.
Interest paid on a large majority of different kinds of debt is not tax deductible, notwithstanding interest paid on a home loan is, thus interest paid on a HELOC can really be a form of less costly debt, suppose, you've a 11% HELOC for up to $15,000, with most HELOC's you don't in reality borrow the entire total amount at the same time, you draw down on it, as you would a credit card, as needed and desired, so, you've considerable gains, you can borrow only what you need keeping the payments and the interest owed as little as possible and you are able to reduce your taxes through a percentage of the interest paid per financial year.
If you had a credit card that charged 11% APR the big advantage is crystal clear, you pay a net lower amount of dollars to the lender following using a HELOC instead of a credit card to finance your purchases, however like any loan, it's essential not to forget that a home equity loan is just that, a loan or debt. If one of your big issues is the inability to exercise the will to stop from spending beyond your means, you have just found another means to feed your addiction, as a result, a home equity loan may actually make your fundamental problems worse, instead of helping.
Notwithstanding, if you have formed a commitment to manage your debt and are seeking ways to lower your total bills, a home equity loan is often a practical method to utilize.
One crucial exercise is to in reality calculate how much money you would be spending per month and over the life of the debt in one outcome versus the other, there are debt calculators readily available on-line to assist you achieve just that, often you'll have to weigh up whether you prefer to spend more dollars over the life of the debt as opposed to having a smaller monthly repayment with a higher total amount of interest, the better calculators / tools may assist you run by both strategies, changing amounts to help you weigh the pros and cons of using a home equity loan in your debt consolidation program.
Both Carrie Reeder & Ian Wilkie 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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