Consolidation loans are a popular way to get a handle on debt. You get the convenience of rolling all your debts into a single monthly payment, which is often lower than what you were paying before, due to a lower interest rate, a longer repayment period or a combination of both.
A mortgage-based debt consolidation loan can be a good option for a number a reasons. First, mortgage rates tend to be lower than the interest rates than other types of debt, particularly credit cards and other unsecured loans. Second, mortgages can be repaid over a long period of time, which helps reduce your monthly payments. Third, interest paid on mortgage debt, even from a debt consolidation, is tax-deductible up to certain limits so that can save you money as well.
A Mortgage Debt Consolidation Loan can be one of two types: a home equity loan/line of credit, or a cash-out refinance.
Both types of loans have their advantages. A cash-out refinance allows you to consolidate all your debt into a single loan and usually offers the best mortgage rates and the longest repayment periods, up to 30 years.
Home equity is the difference between the value of your home and the remaining mortgage balance. Your home equity increases as you pay off your mortgage and as your home goes up in value.
You can use your home equity to get a loan or line of credit, which, like a debt consolidation mortgage, payday loans Pennsylvania combines your debts into one payment.
For home equity loans, the lender uses your home as security. Interest rates on equity lines of credit are lower compared to other loans. You get a higher credit limit, which is useful on higher interest loans. On a home equity line of credit , you can get a maximum of 65% of your home’s appraised value. The more equity you have in your home, the more money you can borrow.
Generally, you pay interest on the money you use, not on your total credit limit. Interest rates fluctuate depending on market conditions, so your payments could go up. As long as you pay the minimum payments, you can make multiple payments without penalty. Fees apply, such as appraisals, title search, title insurance and legal fees.
The smartest strategy for accessing your home equity depends mostly on what you want to do with the money. Of course, your credit score and financial situation matter, too. However, they will be factors regardless of the option you choose. These choices usually match with the situations and goals listed below.
Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
The mortgage market has changed a lot in the past decade or so. In the past, virtually anybody could get a mortgageeven one for much more than they could afford. At that time, interest rates were higher, but lending standards were easier. Today its harder to qualify, and interest rates are just starting to move up from historic lows.
Maybe you took out a second mortgage back when rates were high. Thats just one reason you might consider consolidating your loans. But should you? Does it make sense? Or is it best to keep the loans separate?