Debt Consolidation
How and why consolidate?
You're probably hearing an
awful lot about consolidation these
days. Mortgage interest rates are
low, so a lot of people are taking
advantage. You can use the equity
in your home to free up cash flow
and pay off higher-interest debt,
such as credit cards.
Ways to consolidate
Here are the most common ways that
people use the equity in their home
to consolidate debt:
Home Equity Loan
Consider a home equity loan if you
have equity in your home and your
interest rate is already lower than
rates being offered today. This
is an additional loan that borrows
against the equity in your home.
If you have $40,000 equity in your
home and you'd like to pay
off $10,000 in high interest credit
card debt, you simply take out a
$10,000 home equity loan. Note that
most home equity loans generally
have higher interest rates than
cash-out refinances (see below),
but it's likely a much more
favorable rate to what you're
paying in interest on that credit
card debt.
Cash-Out Refinance
When you have lots of equity in
your home and your current mortgage
interest rate is higher than rates
being offered today, a cash-out
refinance is likely your best bet.
With this option, you pay off your
current mortgage and get cash back,
which then can be used to pay off
credit cards and other loans. Your
new loan amount will then be more
than what you had owed on your old
mortgage. However, you'll
still have the same amount of total
debt that you had before -
it's just been "consolidated" at a lower interest rate in one
place.
What about if you have little or
no equity in your home? You can
still sometimes get a cash back
home equity loan at a lower rate
than most credit cards. |
