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Debt Consolidation - Elliminating High Interest Debt



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Debt Consolidation Loans

By taking advantage of the equity in their homes, homeowners can get rid of high-interest rate debts, lower their monthly debt payments, consolidate many debts into a single, lower payment, turn non-deductible debt into tax-deductible debt, and even take out some cash to use for any purpose. In some cases, debt consolidation loan can save thousands of dollars over the life of the loan.

What is a debt consolidation loan?

When a new loan is secured for the purpose of paying off two or more existing loans, this is called a debt consolidation loan. For most homeowners, the ideal type of debt consolidation is a Home Equity Loan. This is a second mortgage that uses home equity as collateral. Home equity is the difference between the value of a home and the total amout borrowed against that value. In the past, some lenders have allowed homeowners to borrow above and beyond the equity in their home. A 125% home equity loan is a loan that leaves the homeowner owing 25% more than the value of the home, meaning if the home is valued at $100,000, the sum of the loans (the original mortgage in addition to the home equity loan and any other loans taken against the value of the home) is $125,000. This means the homeowner has $25,000 in negative equity. This type of loan is harder to come by than it used to be, because 125% loans have higher default rates than other loan types. Especially if the value of a home begins to drop and/or the homeowners income falls, the homeowner enter into foreclosure, sometimes even voluntarily.

But while these 125 loans are not as popular, home equity loans, in general, are still a wonderful options in many circumstances. It allows the homeowner to pay off high interest rate credit cards, overdue federal income tax, student loans, and non-secured signature loans, trading these payments in for a new mortgage payment.

Another type of home equity loan to consider is a home equity line of credit, or HELOC. The homeowner can chose how much of this line of credit to exercise at any point. The interest rate on each withdraw is set by the current intesest rates at the time of the withdrawal.

Debt consolidation loans have been a means by which hundreds of thousands of homeowners have been able to use their home values to save money.  By taking advantage of a debt consolidation loan (2nd mortgage) a borrower is able to combine the balances of current bills and debts into one loan... and one payment. Below is an example of how this can save money.

Bills Balance Payments Debt Consolidation Loan
Credit Card #1 $5,850 $135.00 -0-
Credit Card #2 $5,300 $157.50 -0-
Credit Card #3 $5,060 $249.00 -0-
Credit Card #4 $5,200 $262.50 -0-
Credit Card #5 $2,600 $87.00 -0-
Credit Union $1,790 $83.00 -0-
Car Payment $10,090 $262.50 -0-
TOTAL $35,890 $1,236.50 $481.20*

*Based on a $43,000 loan over 25 years at 13% APR 15.934  

This example shows a savings of $755.30 per month (over $9,000 per year). This is a conservative estimate; much better interest rates than this are available today. Homeowners should evaluate their current debt, the amount of equity in their home, and the current interest rates regularly to see whether a debt consolidation loan would reduce total monthly debt payments. Homeowners should also calculate how much total interest they are scheduled to pay over the course of their current loans, and compare that to a debt consolidation loan. Further, since the interest paid on a debt consolidation loan is that of a home loan, the interest may be tax deductible.*

* Consult your tax advisor for details.                        


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