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A lower interest rate and monthly payment on your home equity loan can free up cash for other uses, or make your debt more manageable. Interest rates move in cycles, so the best time to refinance is when rates drop. "If you plan to be there a long time, then home equity sense," says Steve O'Connor, senior director of residential finance for the Mortgage Bankers Association of America.
You can refinance and take cash out. With today's current interest rates this is an attractive option (especially if you're paying more than 7.5% interest on your current mortgage). Refinancing with a no points loan would allow you to drop your payment and pull money out with out any expense.
For example, let's say your home is currently worth $200,000 and you owe $120,000 (which is 60 percent Loan - to - Value). You could still access up to $40,000 worth of home equity at a cost of approximately 7.5%, and because your LTV is still under 80%, you won't have to pay mortgage insurance. Talk to your lender to find out the interest rate you qualify for and pay off credit cards that are costing you 10 - 21%. It costs nothing and you save money.
A debt consolidation loan does not reduce the amount you owe. Instead, it lowers the interest rate you pay. You will still need to keep your debt low, and if you have extra money, save it, invest it, or pay off your mortgage early. If you already have a great rate and just want to utilize some of the equity in your home, get a home equity loan and borrow only the amount you need to access. Typically interest rates for a home equity loan are a little higher than your first mortgage because it is higher risk for the lender. If something was to happen and both mortgages couldn't be paid off, the first mortgage would be paid first. Any remaining money would be used to pay the lender for the second mortgage.
Debt consolidation, if done properly, can allow you to simplify your bookkeeping system and to potentially pay off your loans at an overall lower interest rate. But it sometimes requires offering items you own as collateral in case you can?t pay it off and can lead to pushing you even further into debt. Many credit-card issuers offer new cards with low initial teaser rates in the range of 5.9%, suggesting that you consolidate your debt and pay it off at that low rate.
But Jane King, a financial planner in Boston who has evaluated these offers for a number of clients, says that, ?the fine print usually reveals additional rates and fees." Furthermore, the rate is a temporary one that doesn't last long enough to get the bills paid off.
First, if you go through a debt management program and make less than minimum payments on your debt, it will show up on your credit report. Second, credit issuers sponsor the service so the counselors have a bias toward helping you to pay off debt rather than filing for bankruptcy. If you really must file for bankruptcy to get a fresh start, you?ll need to go elsewhere.
Conclusion
Your lender can help you decide what loan type is best for you. As always, especially if you have additional questions, discuss your situation with your financial or tax advisor to determine if a debt consolidation loan is right for you. Still, the credit counseling service can be a great boon to those who feel panicky about their debt and unable to cope with the consequences. ?One of the greatest benefits of this service is peace of mind,"
Deitweiler says. "It can help you get a good night's sleep and get back on track."
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