Use Mortgage Calculators and be Smart About Debt Consolidation

You can reduce your monthly payments and number of bills by consolidating your debt. But research and choose your strategy wisely to avoid pitfalls

If you're having trouble keeping track of all your monthly debt payments, you might consider consolidating your debts into one loan. This can simplify your life by reducing the number of bills and--if you shop carefully--lower the amount of interest you pay.

Here are some options and things to keep in mind if you're considering debt consolidation:

Home Equity Loan
If you have enough equity in your home, you may qualify for a home equity loan to pay off your credit card bills, and you may be able to write off the home equity loan interest as a tax deduction, the way you do with the interest on your mortgage. There are deduction limits, though, so check with your tax advisor. The downside? Unlike the unsecured credit you have with credit cards, this loan is collateralized by your home, so you could lose your property if you default. Figure out your payments over time with an amortization calculator and use a loan comparison calculator to compare loans with different terms.

Cash-out Refinancing
Refinancing is another option if you have lots of home equity, and it's a smart move if you can get a lower interest rate than what you're already paying on your mortgage. Try a refinance calculator to compare monthly payments. To pay off debt, refinance for more than you owe on the home and then use the extra cash to pay off your creditors.

Personal Loan
Consider a personal bank loan if you rent or are short on home equity. Personal loans carry higher interest rates than mortgages, but you you can still pay less interest than the 19% or more charged by credit card companies.

Beware of Debt Settlement
With a debt settlement plan, you pay a company to settle your debts with creditors. Often the companies will ask you to stop paying your creditors, and then they negotiate settlements on your behalf for less than you owe. The trouble is the debts are reported as "settled" to credit bureaus, and your credit score tanks. In addition, the amounts forgiven are taxable. By the time you pay the debt settlement company, the creditors, and the IRS, you might not be any better off.

Improve Your Financial Health
Debt consolidation won't help you over the long run if you don't address the issues that led to getting overwhelmed in the first place. Evaluate your finances and create a budget. Work only with reputable credit counselors if you need help. Check with the National Foundation for Credit Counseling for referrals to local agencies.


Posted By :
Barbara Marquand is a freelance writer who writes frequently on mortgage and personal finance topics.

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