Debt Consolidation

     There are many forms of Debt Consolidation and when you first start looking into this option the definition of the term is a bit fuzzy! As I originally stated, a true debt consolidation is a loan than pays off all you existing unsecured debt and you are left with one loan payment at a lower interest rate. The vast majority of the time this loan is a secured loan against your home. This is why you usually need to be a home owner. I say usually because it is possible to get a loan to consolidate your debts without home ownership however this requires decent to good credit because it is not a secured loan. To make the issue more confusing many Credit Counseling companies call their services debt consolidation. However, in this case they are taking a lump sum payment from you and redistributing this payment to your creditors under the reduced payment terms they arranged! In either words, it is not a loan... Therefore, with a true debt consolidation you either refinance you current mortgage and cash out (increasing your current loan to pay off your unsecured debts) or you take a home equity loan against your home to pay off the debts.

     The disadvantages to consolidating your debts are simple. For one, you need enough decent credit to get a home loan. The quality of credit you need varies from lender to lender but you can figure your FICO score should be at least 580.



     If your credit score is not at least a 580 you can and should still try for a consolidation loan because the banks are offering new loan programs all the time and only they will be able to tell you if they have a program that will work for you.

     The other disadvantage to consolidating your debt is the fact you are now raising your mortgage payment. This is something to be very cautious with because if you struggle to make your payments after the consolidation your home is at risk of foreclosure. This is something only you can evaluate. I strongly suggest you make a budget before you due a debt consolidation based on your current payments. Then set up a budget based on your new payments after your debt consolidation (the lender will give you a GFE - Good Faith Estimate & a TIL -Truth in Lending that will state your new payments). Once you've done this ask yourself, Can I meets these new payments? If you answer no problem great, due the consolidation. If you answer, its going to be tight, I suggest you look for other options!

Click here to get an online home budget

     The advantages to a debt consolidation are also simple and straight forward. First, you end up with a much better interest rate on your loan than credit cards. Next the loan is typically based on a 30 year amortization which lowers your payment along with the lower interest rate. Last, you can use the interest on this loan as a tax deduction, increasing your take home paycheck. For more information on tax deductions see your tax advisor!

     In all, debt consolidation loans can really help but they are not for everyone. Each situation is different and only you can decide which option is best for you! If you are considering this option we highly recomend Ameriquest Mortgage at the link below.



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