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Debt consolidation loanCredit cards carry a very high interest rate, and the interest is not tax deductible. Before you know it, those minimum payments add up to a lot and suddenly there is too much month left at the end of your paycheck. Why not make a very smart financial decision that can have a major impact on your future? Refinance your mortgage with a debt consolidation loan, and use the proceeds to pay off your credit card and other debts.Your first reaction is probably: are you kidding? Now it's going to take me 30 years to pay off the credit card debt that I used to buy a stereo, video games and bicycles for the kids. If I add all the interest up over 30 years, that stereo is going to end up costing me $25,000 (this is a fictitious number to illustrate your point). Hmmmm. Good point. BUT! Instead of borrowing money at 15%, 21% or 30% (credit card debt), you are borrowing it at 6%, 7% or 8%. This means that if you make the same payment on the new debt consolidation loan that you used to make on the credit cards, you would save many thousands of dollars in credit card interest, because much more of your payment is going toward reducing the principal and much less goes toward interest. But wait, there's more! Uncle Sam is volunteering to help. Mortgage interest is tax deductible, credit card interest is not. So not only are you paying less interest, but the interest that you are paying will give you a tax break. This means more money in your pocket. Which is what really counts. |
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Why debt consolidation?It saves you from getting carpal tunnel syndrome from writing ten checks a month instead of writing just one. Kidding aside, there are soft benefits other than the hard benefits described above. If you have to remember to write ten checks every month, the odds of forgetting to pay that tiny little credit card bill is highly increased. Especially if you are struggling to make ends meet. This means your credit is going to get hurt when you get a 30 day late on your report from missing one payment. Now if you are a very organized person, and diligently pay your bills on time every month, this soft benefit is not really for you.The more important one is that you ease the strain on your monthly cash flow. Since your monthly payments are much reduced after doing a debt consolidation loan, your paycheck will go further. It is like giving yourself a raise. Now you need to be real careful not to fall back into old habits. What do I need to know that will hurt me if I didn't?If you did a debt consolidation loan by paying off your credit cards with your mortgage proceeds, and then go ahead and spend on your credit cards again, you have actually made your situation much, much worse. Now you have old credit card debt rolled into your loan that you are paying on, and you have new credit card debt piling up, and before you know it you are exactly where you were before. Except worse. Because now you may not have enough equity left to do the same thing again. And you have taken your short term debt and turned it into long term debt.The right thing to do after doing debt consolidation is to use the monthly savings you have realized and invest it for a higher return than the cost of the mortgage, or to pay your mortgage down quicker. AND STOP USING THE CREDIT CARDS!! How do I apply for a debt consolidation loan?When you apply for the mortgage, your lender/broker will ask you what the purpose of your refinance transaction is. You will then tell him/her that you will be consolidating debts. Your loan officer will then ask for the statements of the debts that you will be paying off. He/she should be able to demonstrate your monthly payment savings to you. When you get to the closing table to sign for your new mortgage, the proceeds from the loan will be paid directly to the debtors. In other words, you will not be getting a check at the closing table. |
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