Paying down your debt (part 5)

Home equity to reduce debt

By using a home equity loan, you may very well be able to get rid of your existing higher interest rated loans at once, by using the cash you get from a home equity line of credit to pay them off. The lowest interest rates are typically found on loans you take out that are secured by your home. Lenders know that people will nearly do anything to keep their home, so these types of loans are usually considered lower in risk of not being paid and they carry great interest rates. If you have a mortgage or equity in your home, here is what you want to consider.

Refinancing your primary mortgage

The lowest fixed rates of interest are usually found on your first mortgage – your primary mortgage. But, you should have a solid budget that you can live within before thinking of refinancing your primary mortgage to consolidate car loans or credit card debt. Many times, people see refinancing as a way to lower their total monthly payments. They fail to realize that hey are taking on a very long term loan obligation, typically a 30 year one at that.

In many cases, the old care loan might be paid off in two or three years and the credit cards could be paid off a few years after that. This would leave only ten or twenty years on your existing mortgage – so consider this. If you took on the new mortgage with all the debts combined it would mean 30 more years of payments. If you take out a new car loan in say five years or so you will be adding another debt on top of the other new mortgage debt – so be aware. If you also put new charges on those credit cards you decided to keep open after paying them off with the new mortgage, you will end up owing much more than you did before and have twenty or so more years of big debt.

The optimal time to refinance is after you have achieved the ability to live within a new budget and have shown you can reduce your debt with existing income and expenses. You really have to have the ability to think long and very carefully before committing to 30 years of additional debt even if it has a low interest rate.

Home equity loans

A better way to lower your interest rates might be with a 5 or 10 year home equity loan. This plan would be a second mortgage (or a first if you own your home outright) for a fixed amount for a fixed amount of time with a fixed payment due each month. These loans let you consolidate loans like credit card debts and such into one low interest rated loan payment. It also combines you visual chart into one spot fro tracking your debt reduction.

On the other hand, it would put your home at risk, but it may also make you more careful about paying your credit off on time. For a home equity loan, it is imperative that you select terms you can afford. Be certain to pick a term (5 or 10 years) that yields a payment in your affordable range. Don’t put yourself in the position where you have to renegotiate the loan after a couple of years because you can’t afford to pay it.

When you utilize your home equity in the form of either a loan or a line of credit, be absolutely certain that you have calculated upfront coasts such as application fees, appraisal fees and such before you commit.

Home equity line of credit

This type of loan carries a line of credit and is different from a home equity loan. A home equity loans acts more like a car loan (fixed terms) whereas a home equity line of credit initially works more like a credit card. It lets you borrow (charge) amounts daily, weekly or monthly up to the amount of the pre established line of credit loan amount. Typically, you pay a percentage of the amount borrowed each month and are charged interest on the outstanding balance you have acquired. After a period of time, typically 5-7 years into the loan, the line of credit ends and the loan converts to a fixed rate payment for a fixed amount of time.

This type of loan works best fro college payments or home improvement projects. You know hoe much you are willing to spend, you just need more time than the college or other creditor will allow you to make the existing loans get paid off.

Just be sure that if you go through with this type of loan, that you are not paying for meals and gas with it. This loan should be one focused on home improvements and such – something you will have to show for it once it is paid off!

Be certain that you plan this type of loan well before you it for short term cash access. Remember that if you default on a home equity line of credit, the ban can take steps toward foreclosure in order to get their money back.

Part 5...

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