Debt Consolidation Loan Choices
Some homeowners opt to re-finance to consolidate their
existing debts. A couple of years ago that was quite easy to do.
With the
subprime mortgage crisis
and the huge problems with the secondary mortgage market, this
is now rather difficult to do unless you have significant equity
in your home and very good credit.
With this type of option, the homeowner can
consolidate higher interest debts such as credit card debts
under a lower interest home loan. The interest rates associated
with home loans are traditionally lower than the rates
associated with credit cards by a considerable amount.
Deciding
whether or not to re-finance for the purpose of debt
consolidation can be a rather tricky issue. There are a number
of complex factors which enter into the equation including the
amount of existing debt, the difference in interest rates as
well as the difference in loan terms and the current financial
situation of the homeowner.
This article will attempt to make this issue less complex by
answering to two key questions homeowners should ask
themselves before re-financing. These questions include whether
the homeowner will pay more in the long run by consolidating
their debt and will the homeowners financial situation improve
if they re-finance.
Prior to the debt consolidation the homeowner may have been
repaying a monthly debt to one or more credit card companies, an
auto lender, a student loan lender or any number of other
lenders but now the homeowner is repaying one debt to the
mortgage lender who provided the debt consolidation loan. This
new loan will be subject to the applicable loan terms including
interest rates and repayment period. Any terms associated with
the individual loans are no longer valid as each of these loans
has been repaid in full.
Best Debt Consolidation Companies
With the virtual freeze up of the secondary mortgage market
as described in the article mentioned above, banks now have to
lend money from their own deposits. This has caused banks to
tighten their lending standards dramatically. Other banks have
virtually stopped lending on real estate altogether. However,
they usually will not come right out and declare that to
potential borrowers. They simply tighten the standards to the
point where nobody qualifies for a mortgage loan.
With the lack of funds available for real estate lending
coupled with tighter standards, it will be important to find a
bank that has sufficient deposits available. This would tend to
be the larger banks. But at the same time, you'll want a bank
that hasn't been overexposed to the subprime mess and hasn't
tightened lending standards to the point where it is impossible
to qualify. ING DIRECT Orange Mortgage
currently is the top of the list.
When considering debt consolidation it is important to determine
whether lower monthly payments or an overall increase in savings
is being sought. This is an important consideration because
while debt consolidation can lead to lower monthly payments when
a lower interest mortgage is obtained to repay higher interest
debts there is not always an overall cost savings.
As an example consider a debt with a relatively short loan term
of five years and an interest only slightly higher than the rate
associated with the debt consolidation loan. In this case, if
the term of the debt consolidation loan, is 30 years the
repayment of the original loan would be stretched out over the
course of 30 years at an interest rate which is only slightly
lower than the original rate. In this case it is clear the
homeowner might end up paying more in the long run. However, the
monthly payments will probably be drastically reduced. This type
of decision forces the homeowner to decide whether an overall
savings or lower monthly payments is more important.
Will Re-Financing Improve Your Financial Situation?
Homeowners who are considering re-financing for the purpose of
debt consolidation should carefully consider whether or not
their financial situation will be improved by re-financing. This
is important as some homeowners may opt to re-finance because it
increases their monthly cash flow even if it does not result in
an overall cost savings. Be careful that your debt
consolidation loan is worth the cost.
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