Debt Consolidation

The last thing you need, in addition to debt consolidation financing, is a mountain of extra costs to get your low interest debt consolidation loan. The costs you might incur will differ depending on the type of loan you select to complete your debt consolidation plan.

If you decide to refinance your current first mortgage to accomplish your goal, you will incur the usual closing costs, which will probably amount to around 2% to 2.5% of your new loan amount. All the regular closing cost items should apply, including full appraisal, title examination, recording fees, title insurance, etc. and, of course, possibly one or more points. This is not a negative but should be considered when deciding which solution to use.

Should you decide on using a debt consolidation home equity loan, your additional costs should be much less than with a full refinance. Even if you are required to pay one or more points, they will be calculated only on the amount of your new loan, without regard for your first mortgage balance. Many other closing costs associated with a first mortgage will be reduced or eliminated. Remember, you won't receive an interest rate as low as a first mortgage nor will you have the luxury of a 30 year repayment. That is the direct trade off.

Whichever debt consolidation home loan you choose, if the choice achieves your goal of lower interest and smaller monthly payments, your decision is probably the correct one. While you, of course, want to keep costs to a minimum, smartly search for the right loan and the best lender. You will be pleased with the result.

Your interest expense with a debt consolidation home loan may or may not be tax deductible. Should you choose to refinance your current first mortgage to include the pay off of your present short term high rate debt, like unsecured loans and credit card balances, the interest you pay will be tax deductible in most cases. First mortgage interest expenses are almost always tax deductible so this is your safest choice from a tax perspective.

If you decide a debt consolidation home equity loan is the best choice for you, your interest expense may or may not be deductible. First, the maximum home equity loan balance allowed for tax deductibility is $100,000. The interest you pay on a home equity loan balance over this amount is not deductible. Second, if your home is worth $210,000 with a $150,000 first mortgage, and you get a home equity loan for $85,000, the interest on $25,000 will not be deductible. Since you have loans that total more than the value of your home, the excess is considered an unsecured loan, just like a credit card line of credit. Finally, from a technical perspective, if you are using the proceeds of a home equity loan to pay down unsecured debts and not for home improvement, education, or another qualified reason, your interest expense may also not be deductible.

The answer to the above questions is always the same: Consult your tax advisor before submitting your income tax return to learn if your interest expense on a debt consolidation home equity loan is tax deductible.

Do not despair if you have less than perfect credit and need a debt consolidation home loan. First, determine just how poor your current credit score really is. Unless it is a total disaster, you should still be able to secure a bad credit debt consolidation loan at much better interest rates than you now have. Using a first mortgage or home equity loan, you can still accomplish debt consolidation with bad credit that will improve your monthly cash flow and lower your interest expense.

Debt consolidation loans for bad credit, while not overly plentiful, are available for quite a few lenders. Although some may wonder why a lender would offer these, it makes financial sense to do so. They are putting a loan in the portfolio secured by your home and at a rate that will be higher than the same loan to a perfect credit borrower. In addition, your cash flow will be immediately improved with a new lower payment, making it easier for you to make the required payments as agreed. This is just as good for your lender as it is for you. Everyone wins.

There are many companies offering free debt consolidation services to consumers. People often ask, "Are these services really free?" The answer is yes, at least to the consumer. A debt consolidation agency that advertises its services as free should be just that. Some consumer advocacy groups have expressed some concerns about some of these organizations, however.

Even though many debt consolidation services are organized as non-profit corporations, they, like all businesses, need income to survive. Many of these companies generate their income from lenders (banks, credit unions, loan companies, credit card companies, etc.), who pay fees on a regular and recurring basis to the credit counseling agency. Why? Lenders want their loans repaid. Credit counseling and debt consolidation companies have the same goal as they attempt to help borrowers facing potential trouble. In addition, they sometimes earn fees for arranging debt consolidation loans. Concerns sometimes arise because some people question whether it is possible for the company to represent your best interests to the real sources of their income, the lending community.

Some experts counter that the best debt consolidation company is the one achieves a balance resulting in a win-win situation for both you and your lenders. Whether giving you debt consolidation information, helping you with debt consolidation lending issues, or physically making payment arrangements with lenders, credit counseling and debt consolidation services can help you reorganize your finances.

Debt consolidation loans work a bit differently depending on whether they are secured or unsecured. Unsecured debt consolidation programs will spread out your combined monthly payments a bit and usually give you a more reasonable interest rate. This combination gives you a workable solution to achieve consumer debt consolidation. It's then up to you to generate the personal discipline to make these payments on time and not, under any circumstances short of emergency, rebuild your former high interest rate short term loan balances.

Secured debt consolidation loans provide even more help in low interest debt consolidation. Using a mortgage refinance or home equity loan secured by your primary residence, you can eliminate your high interest debt and repay the total balance at interest rates as much as 60% to 70% less and spread out the repayment over 10 to 30 years.

You get together all the facts surrounding your current short term debt, including balances, interest rates, and monthly payments. Using a debt consolidation calculator, compare your monthly cash outflow currently with what it might be if you used a debt consolidation refinance loan. If you see a considerable difference, you should consider the loan. You will submit the names of your creditors and current balances when you close the debt consolidation refinancing, and they will be paid off from the proceeds of your new loan. You will then be obligated only for the new regular monthly payment due on your new debt consolidation mortgage refinance.

There are numerous debt consolidation companies providing services to those wishing to improve their financial situation. As with every industry, there are good and not-so-good debt consolidators. Most lenders are legitimate and hard working, and can provide excellent debt consolidation advice. Others, as you might expect, are more concerned with their own bottom line much more than yours. There are also operating differences you should consider.

Some debt consolidation firms are organized as non-profit entities while others operate as normal for-profit companies. Debt consolidation counseling firms may provide useful advice only or may offer to have you agree to full debt consolidation management. None of these scenarios are better or worse than another as it is more of a personal preference issue. The reason to consider using debt consolidation credit counseling is usually the same: Getting assistance in constructing a debt consolidation plan to improve your financial position.

Do your homework and thoroughly investigate any debt consolidation help you are considering. Determine what might be best for you. Do you just need advice or a physical administrator to design a plan and make it work? As long as you are dealing with a legitimate and effective company, you will most probably be happy with the results they are able to achieve.

An excellent way to improve your financial position can be debt consolidation home equity loans. Is it always wise to use home equity debt consolidation? Not necessarily. If you have a first mortgage written at a higher interest rate than that which you could obtain now, you might prefer to use a debt consolidation mortgage refinance instead. In this case, this may be the best debt consolidation plan. On the other hand, if you have a first mortgage with an excellent, below market rate and terms, you might be better served by leaving it alone and using a home equity debt consolidation loan.

Home equity loans are wonderful choices for bill consolidation loans because they can spread out your payments up to 15 years and should give you a much lower interest rate than you are currently paying for your unsecured debt. Use a loan consolidation calculator and calculate the potential cash flow and interest rate differences. It will quickly become clear whether or not consolidation loans are the best course of action for you.

You might even find a bad credit debt consolidation loan using your home equity and still get some benefit of secured loan consolidation rates, which should be quite a bit lower than you are now paying. Compared to your current interest rates this might still qualify as a low interest debt consolidation loan.

Combining a mortgage loan refinance and debt consolidation can be beneficial in more than one way. Both major benefits put more cash in your pocket every month. First, consider the interest rates. Using a mortgage refinance for consolidation of debt usually means trading one or more fairly high interest rate loans for much lower mortgage loan rates. Most people, financial gurus or not, will trade an 18% loan for a 6% loan in every instance. Further, since first mortgage loan interest paid is tax deductible, your effective rate is even lower. If you have a 6% mortgage rate and you are in a 20% tax category, your effective interest rate is only 4.8% (6 X .20 = 1.2).

Second, your short term debt is probably spread out over 36 to 60 months for pay back. If you take those same balances and work them into a debt consolidation mortgage loan, they will be spread out to 15 to 20 years, costing you much less each month. Using mortgage loans for debt consolidation can save you potentially hundreds of dollars in payments every 30 days.

Please accept an important word of caution, however. If you plan on using a debt consolidation mortgage to eliminate current short term debt only to replace your former balances with new short term debt, you risk an even more serious financial problem. Remember, once you eliminate your short term revolving debt balances, you can access your credit limits once again. If you make the all-to-common mistake of doing so, you risk digging a much larger financial hole than the one from which you just escaped. Don't do it. Enjoy your new cash flow increase to save money or pay cash for items you need instead of using high interest short term financing.