Debt Consolidation Loans for Homeowners
Debt consolidation loans are essentially home equity loans which are used specifically for consolidating your debts. Here are some basic considerations.
Obviously, the main benefit of a debt consolidation loan is to save money. First determine the minimum savings that would make a debt consolidation loan worthwhile. Then calculate how long it will take to break even by dividing the loan closing costs by the amount that your monthly debt payments are reduced. Then consider how long you plan to stay in your home compared to the time that it takes to break even.
Debt consolidation loans convert your debt from daily compounded interest on credit cards to an annual simple interest loan. For example, if you compare the difference in the interest paid on a balance of $40,000 at the same interest rates, you would save approximately $50 per month. Of course your savings is even greater when you consolidate debts into a lower rate loan.
Paying the minimum on credit cards can only delay the pay off and causes more interest to accumulate. The fixed rate payment schedule of a debt consolidation loan can help you escape from the minimum payment syndrome that can prolong balances. Also, debt consolidation loans allow you the option of accelerating the pay off, so if you want to reduce the loan quickly, you could apply part of the monthly savings to the principal loan balance.
Another advantage is the benefit of a new tax deduction, because a debt consolidation loan is secured by a mortgage lien on your home. |
