Debt Consolidation Refinance
Refinance - Doing a debt consolidation refinance is a very common type of
refinance and is one of many reasons to refinance your home mortgage loan. Consolidating debt into your mortgage has numerous benefits. One such benefit of refinancing your debt into your mortgage is that you are generally able to save quite a bit of money each month through the consolidation. A quick example to show you how you can save a lot of money is as follows:
Lets say you are currently paying a 7% interest rate on your mortgage with a balance of 100,000 dollars. Your monthly mortgage payment is $800. You also have 5 credit cards with a total balance of 20,000 and a total of $750 of minimum monthly payments. This gives you total monthly expenses of $1,550 ($800 mortgage payment + $750 credit card payments). By consolidating these into your mortgage at the same 7% interest rate your new total monthly mortgage payment on a 120,000 loan ($100,000 mortgage balance + $20,000 credit card debt) might be $1,000. Therefore, you would have eliminated all of your credit card debt and credit card payments and you will have also saved $550 from your total monthly expenditures ($1,550 total monthly payments - $1,000 new mortgage payment). Consult your mortgage professional to find out how you can start saving money immediately.
One of the greatest risks of relying heavily on credit cards is assuming that only high interest cards can be damaging to your credit. In fact some of the most damaging accounts you can have on your credit report are the 0% interest cards and accounts opened popularly by department, furniture and electronics stores. You've seen it before, no payments for 1 year. Sounds great right? What they don't tell you is that the $10,000 HDTV setup shows up as a $10,000 balance on a $10,000 limit credit account (which will drop your scores dramatically as soon as it's opened) and then you make no payments for 1 full year, so there is no payment history to get those points back. While you will ultimately have to decide what to pay off and when, debt consolidation using home equity can afford you the opprtunity to get clean, simplified reporting and tax deductible interest on all of your outstanding debts, and is a great way to make a clean start.
A third benefit of a debt consolidation loan is that you create a better tax advantage. The interest you pay on credit cards, car loans and other consumer debt is not tax deductible. However, the interst you pay on a Home Mortgage or Home Equity Line of Credit is tax deductible. So even if you are transferring credit card or other debt with low interest rates you most likely still will come out ahead because of the tax advantage.
This type of refi can save you hundreds of dollars per month in your overall debt payments
A second benefit to a debt consolidation loan is the positive impact on your credit score if you payoff your credit cards or other accounts that have high interest rate and or a high balance. It is impossible to create a financial plan or budget when you credit payments are increasing each month. With a fixed credit payment each month, a realistic and low stress budget can be managed.
Another benefit that many people don't cosider is the improved cash-flow created by a debt consolidation refinance and the investment potential it creates. In the above scenario, you save $550 per month by consolidating your debt into your mortgage. The improved cash flow of $550 per month can be used to create more wealth by saving or investing it to get a return on that money. Putting $550 per month into a savings account for 12 months results in a balance at the end of the year of $6600. Over the 30-year term of the average mortgage, saving $550 per month means you will have accumulated $198,000 - enough to pay off that debt consolidation refinance of $120,000! Invest that same $550 per month with a financial advisor or other investment manager and the return on that money will be even greater.
Some people advise against paying off credit card debt with a refinance. They use arguments such as "you're going to be paying on last night's meal at a restaurant for 30 years."
However, that argument has its weaknesses.
If you pay the minimum amount on your credit card every month, you could be paying for that meal for over 20 years. And paying at credit card rates for 20 years will cost more than paying at mortgage rates for 30 years.
Also, a debt consolidation refinance can usually free up some money every month, so you can use your credit cards less in the future.
Many people acquire debt due to unforeseeable life events, such as a birth, the death of a loved one, or loss of employment. Other people accumulate debt because their income cannot support their life style. Make an effort to change the habits that incurred so much debt and keep in mind that when you consolidate credit card debt you are transferring unsecured debt to debt secured by your home.
Debt Consolidation - Utilizing your homes equity for debt consolidation is often a wise decision for many homeowners who are struggling to make ends meet, or for those who just want to increase their monthly cash-flow.
An integrated plan, including credit improvement, and sometimes even a biweekly mortgage reduction program, can help you discipline your spending after a debt consolidation.
Be sure when doing a debt consolidation loan that the monthly savings is significant and that you can comfortably pay the new mortgage. Be very careful that you do not simply run up your bills again after you have received your new loan or you could be in a worse position than before.
Building a strong plan to control all those people's money is a neccesity in any debt consolidation...Over 90% of people that pay off credit cards with a debt consolidation will put more charges on those cards within 180 days...If you care about your borrowers long term financial relationship with you, you had better tie up as much of their disposable cash as possible and either work with them thru the plan or have some type of management company handle it, the majority of people, speaking historically, cannot handle it on their own, the majority will say they will, but history doesn't lie...
Those who have been successful with a debt consolidation do so with the proper mindset. A debt consolidation refinance must be viewed as a one time event. If the excess debt was acquirred from overconsumption, lifestyle changes must be made in order to avoid falling back into the same situation.
Consolidating debt by refinancing into a loan with a minimum payment option is a great way to improve your cash flow twice: Once from reducing your monthly debts by rolling them into the mortgage, and twice by allowing you to make minimum payments as low as $250.00/month per $100,000 borrowed (often less than half the payment on your current mortgage). That's a $500,000 mortgage for a minimum payment of about $1200 a month.
Debt consolidation is a fantastic tool if used properly. First, one must identify the situation that caused the overload in debt. If you don't solve that problem, you will be back in the same situation in a couple of years. If you use the consolidation loan as a tool to rapidly pay off other debt, then you are going to be pleasantly suprised with the results. Most people can pay off all of their credit cards, car notes, and mortgages in as little as 5-7 years if they use the savings from their debt consolidation loan properly.
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Information listed above is to be used for educational purposes only and is not guaranteed