Using Equity in Your Home to Consolidate Debt
If you owe debt on loans and credit cards and are at the point where you are only making your minimum monthly payments, it may be time for some intervention.
Making minimum payments on credit cards often means that you are only paying interest. If making minimum payments is all that you can afford to pay, then essentially the credit card debt will never get paid down.
If you own a home one of the easiest way to consolidate debt is through a mortgage. The challenge is choosing the right mortgage product.
In the finance business everything comes down to money. Banks, lenders and brokers are all incented based on their volumes. The more money they loan, the longer the terms, the more the financial institutions make. Sometimes going directly to a financial institution or a mortgage broker for financial advice is not the best choice. Often the first solution that a mortgage lender will present to you will be the one that earns them the most money. That first solution is refinancing your first mortgage.
The amount of debt that you have, the type of debt that you have, your current mortgage rate and terms, the amount of equity in your home, your credit and your overall financial profile will determine the best strategy to pay off your debt and what resources may be available to you.
If you owe less than $30,000, a second mortgage may be the best choice. Yes, second mortgages often bear a slightly higher interest rate, however they stand completely independent of your first mortgage and offer more flexibility. You can amortize your second mortgage more aggressively so instead of stretching it out over 25-30 years like a first mortgage, you can opt for a shorter amortization that will result in less overall interest and still reduce your monthly payments.
If you owe a significant amount of money, then refinancing your mortgage may be the best choice. However you can refinance your mortgage in a way that not only eliminates the debt but also your overall interest. You can achieve this through obtaining a lower mortgage rate than what you are currently paying, commit to accelerated mortgage payments or reduce your amortization by 5 years. Most folks don’t even realize that simply reducing their mortgage amortization by 5 years will save them tens of thousands of dollars in mortgage and interest payments.
It may be that a mortgage is not even the best choice at all. If you owe more debt than you have property equity, then you may need other financial resources to get out of debt.
The only way to receive impartial advice about how to use your home equity to consolidate debt is to hire a financial advisor to work with you to come up with a financial strategy to get out of debt.