Loan Type Select One Purchase Home Equity Refinance Debt Consolidation FHA/VA State Select a State Alabama Alaska Arizona Arkansas California Colorado Connecticut D.C. Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Credit Rating Select One Excellent Good Fair Poor View Privacy Policy

The Key to Successful Debt Consolidation: Keep Spending Undercontrol Staff - Mortgage Lenders Plus.com

Credit debt consolidation is one of those concepts that sounds great and also seems like a simple process. The simplicity of it really has to do with the tools available to you to work with. Whether or not it is a good concept for you depends on two things: the cost of the consolidation process and your willingness to change your spending habits.

The method of credit debt consolidation that is most likely to pencil out is the use of a home equity loan or a home equity line of credit (HELOC). A home equity loan is a second mortgage, secured by the equity you hold in your home. Because the loan is collateralized, it’s going to be a lot cheaper than an unsecured credit debt consolidation loan. The number one reason people take out home equity loans is for the purpose of retiring expensive, short term debt.

A home equity loan of eight or nine percent is clearly preferable to a credit card that has an APR in high double digits. Nevertheless, it is a loan. Home equity loans and HELOCs allow you to both lower the interest rate on your debt and to stretch out the payments over a long period of time. The net effect is a substantial reduction in your monthly expenses. It is not, however, a reduction in your debt.

The key to successful credit debt consolidation is keeping your spending under control, so that you aren’t running up new credit debt while paying off the old with the cash from your home equity. It’s important to keep in mind that serious credit trouble with a home equity loan isn’t going to just result in a bad credit rating and negotiations with collection agencies. It could cost you your house.

Some people will refinance their first mortgage with a new mortgage, to take advantage of low interest rates. Often, a broker will offer the opportunity to roll accumulated credit debt into the new mortgage, allowing you to borrow more than you owe because of the equity you’ve accumulated. Opportunities like this can be deceptive however. Adding ten or fifteen thousand dollars to your new mortgage could cause the interest rate to increase a little.

That little increase can offset a six or seven percent reduction in your credit card debt, simply because you are paying the “little” increase in interest on the entire mortgage. So you reduce your credit card debt interest by six percent, but raise the interest on a couple of hundred thousand dollars a quarter percent: it’s likely that you’re not saving any money on the deal, although you will lower your monthly outlay. Pencil out your credit card debt consolidation mortgage thoroughly, so you understand what the real savings are.