Posts Tagged ‘consolidate debt’

Using your home for debt consolidation

Ever wonder how debt consolidation works? Should you use your home as collateral to consolidate debt? With the rising costs of everyday life many Americans are looking for ways to lower debt and reduce their monthly expenditures. Many people are turning to professional help such as debt consolidation loans. One of the most popular ways to consolidate debt is using your home as collateral for the loan, but is this a good idea?

With the growing number of television, Internet and newspaper advertisements for debt consolidation loans it may seem very tempting. Debt consolidation companies promise to lower your monthly payments or even eliminate your debt all together. Again it sounds very tempting, but you should be aware of exactly what is going on behind the scenes.

When you contact a debt consolidation company the will usually ask you a series of questions concerning your home. The will want to know how much your home is worth and how much you owe on your home in order to find out how much equity you have in your home. The reason they want to know this is because they are planning on turning all your unsecured debt into secured debt by using your home as collateral.

Using your home as collateral will usually lower your interest rates considerably and in turn lower your monthly payment, but there are some serious concerns to consider. First, if you find yourself in more financial trouble in the future and can’t make the new consolidated payment you will be at risk of losing your home to foreclosure, in turn making your credit and life much worse.

The second thing to consider is that most of us spend as much money as we have every month. Freeing up extra dollars per month after debt consolidation means we have more money every month to spend on other things, things we don’t really need. This in turn causes the debt process to start all over again and you will be in much worse shape than you were before you started the debt consolidation process.

There are some instances where debt consolidation can be very helpful, but you must be a disciplined person willing to make financial sacrifices in order to better your situation. Also make sure the debt consolidation company has your best interests in mind and not their own financial gain. Do some research on any company before you give them any personal information.

Reasons you may want to refinance your home

Interest rates are still very low compared to a decade ago. Average mortgage interest rates continue to stay around the 6.5% mark for the 30 year fixed loan. You may have thought about refinancing your home loan before, but just never got around to following through, or maybe you just didn’t know if it would be in your favor. Everyone’s financial situation is different and you should consider many different factors before you decide to refinance. Some factors to consider are your financial goals, your current interest rates, the currently type of mortgage loan you have, and how long you want to stay in your current home. After you consider these factors here are 5 instances when you may want to consider refinancing your current home mortgage loan.

Refinance from an adjustable rate mortgage (ARM) to a Fixed-Rate Mortgage

An adjustable rate mortgage is a type of mortgage loan that is fixed for a certain amount of time, usually 3, 5, or 7 years. After that time period the rate adjusts usually according to the current prime rate. The interest rate can continue to rise with the prime rate up to a certain percentage. The advantage to an ARM loan is a lower interest rate and payment for a short period of time. If you had an arm loan a couple of years ago with a really low interest rate and that term is expiring you may want to refinance your mortgage loan into a fixed-rate in order to avoid the rising interest rates.

Refinance from a fixed-rate mortgage to an ARM

A fixed-rate mortgage is a loan for a certain time period, usually 15, 20, 25 or 30  years. The interest rate is fixed for the entire period of loan. This is a great deal if interest rates are low when you lock the rate, but bad if the rate you have is much higher than current interest rates. A good time to refinance your fixed-rate mortgage to an ARM loan is if yo are planning on moving in the next 3,5, or 7 years and interest rates are much lower now than your current fixed rate. You can take advantage of the lower interest rates and then purchase your new home before the rates start to rise.

Lower your monthly mortgage paymnet

You may want to consider refinancing your home mortgage loan to lower your monthly mortgage payment. Even the smallest drop in interest rates can change a monthly mortgage payment significantly. For example lets assume you borrowed $250,000 on a home 5 years ago at 7.5% for 30 years. Today interest rates have dropped to 6.25% and you want to consider refinancing the mortgage.  Your original mortgage payment would have been around $1750, your new payment would be $1435 a savings of about $315 per month. I’m assuming you paid your exact payment for 5 years so you would only refinance $233,000. There are other factors to consider such as closing costs but some simple math can save you some money in your monthly budget.

Getting cash from your home for improvements or additions

Wanting to finish the basement, add on a patio, screened in porch or swimming pool? Where will you get the money to do these projects? A great option is a home equity loan. If you got equity in your home you can take out a second mortgage on the house to finance the other projects. Not only will you get a better interest rate than a credit card but the loan is also tax deductible.

Consolidate high interest rate credit card debt

If you’ve got yourself into more debt than you can handle it’s possible to take out a second mortgage on the house to consolidated high interest rate credit card debt.  I’m not a big fan of this method because most people who choose this option will use the credit cards again. Be very careful when taking loans against your home it’s your prized possession and mortgage companies won’t hesitate to take it away from you.