Using your Homes Equity to Consolidate Your Debt |
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Your home can help you consolidate debt. Based on your financial objectives, using your home's equity can be highly beneficial in certain cases. These include elimination of multiple small payments, lowering total payment amount, making debt tax deductible and paying off credit cards.
Refinance to take out cash. Current interest rates make this an attractive option, more so if your payment is over 7.5% in interest for your current mortgage. With a no points loan, refinancing lets you drop payments and retrieve money without any expense. Assume that your home is currently worth $200,000 and you owe $120,000, i.e. 60% loan-to-value. Up to $40,000 worth of home equity can still be accessed at approximately 7.5% and due to your LTV being under 80%, no mortgage insurance has to be paid. Ask your lender about the interest rate you are eligible for and pay off credit cards that cost 10 to 21%. There is no cost, only savings. A debt consolidation loan doesn't reduce the amount owed and instead, lowers your interest rate. Your debt should still be kept low and in case of extra money, save, invest or pay off mortgage early. In case you already have a good rate and only want some equity in your home, go for a home equity loan, for only the amount you require. Interest rates for a home equity loan are typically higher than the first mortgage due to the higher risk for the lender. In the event that both mortgages could not be paid off, the first mortgage is paid first. Any money still remaining can be used to pay for the second mortgage. Proper use of debt consolidation can simplify your bookkeeping system, apart from potentially paying off loans at an overall lower interest rate. However at times it requires your possessions as collateral if you can't pay it off and results in leading you further into debt. Credit cards offer new cards with low initial teaser rates in the 5.9% range to consolidate your debt and pay it off at this low rate. Jane King a Boston financial planner evaluated these offers for several clients. Her opinion is that the fine print usually includes additional rates and fees. Also the rate is temporary, not lasting long enough to get the bills paid off. First going through a debt management program and making less than minimum payments on your debt shows on your credit report. Second, credit issuers sponsor the service with counselors biased toward helping you pay off debt instead of filing for bankruptcy. If filing for bankruptcy is necessary for a fresh start, you'll have to look elsewhere. Conclusion Your lender helps you identify the loan that suits you best. Like always and especially if you have additional questions, consult your financial or tax advisor to select a debt consolidation loan that's best for you. The credit counseling service can still be a great boon for those worried about their debt and unable to handle the consequences. Deitweiler feels peace of mind to be among the greatest pay offs of this service. It helps you get a good night's sleep and back on track. |
