Many Americans spend a lot of their hard-earned income on debt payments from credit cards, student loans, vehicles, personal loans, etc. It’s not hard to feel overwhelmed. Consolidating debt in some manner is often the solution, maybe in the form of an all-in-one loan, or wrapping those debts into your mortgage.Verify my mortgage eligibility (Dec 3rd, 2023)
It’s important to understand what’s involved with each of these options, and to pick the solution that will benefit you most.
Debt consolidation personal loans
How debt consolidation works:
High-interest debt typically comes from unsecured (the lender has no collateral to recoup losses if you default on the debt.) lending sources like credit cards, and It’s easy to get in over your head with multiple high-interest payments going to various lenders each month.
Debt consolidation is oftentimes achieved by replacing these high interest debts with a single, lower interest rate loan. In short, the goal is to lower the monthly costs with this solution.Verify my mortgage eligibility (Dec 3rd, 2023)
Pros and cons of debt consolidation personal loans:
- Secure a lower interest rate to help pay off large debts.
- Reduce your monthly payments.
- Raise your credit score.
- High rates of payment failure
- Extended loan periods can mean you pay more over the full term.
- Default could put your home or other assets in jeopardy.
It’s common to see credit cards rarely or never get paid off, when they have high interest rates of say 12% to 25%, with balances close to the limit, and a minimum payment made monthly. These same cards incur a lot of interest that you must pay! Now imagine that you consolidated all of these debts into one loan at an interest rate between 4 and 9%. The savings would be huge! This would likely improve credit scores significantly as well. Unfortunately, for those who enter into this type of debt consolidation, the failure rate is high.
Debt consolidation refinanceVerify my mortgage eligibility (Dec 3rd, 2023)
The goal of any debt consolidation strategy is to lower your monthly costs, so the best solution is going to be a debt consolidation home refinance. Why? Because interest rates are much lower, and the debt payments are calculated over 30 years.
Here’s how it works: A debt consolidation refinance involves resetting your mortgage at a fixed lower rate available today. At closing, you pull out equity from your home that is used to pay off your outstanding non-mortgage debt. Of course, refinancing comes with closing costs, just like the original mortgage. These often come out to 1-5% of the total loan — so look for an interest rate low enough that you’ll be able to recoup the up-front cost while saving on your external interest payments.
Depending on your terms and rate, the major benefit is obvious. You’ll have a lower monthly payment than you would have paid if you didn’t consolidate your debt or touch your mortgage, and your credit scores will thank you too!