Consolidating debt, should I?
You will get all kinds of different advice from all of your friends, family and neighbors about this subject. So whose advice do you take?
The esiest way to consolidate debt is by refinancing your home if you own one.
Some people believe that you should never use your house to pay off credit cards or vehicle loans. What is your situation? How tight is money in your bank account? This might answer your own question.
The key to consolidating debt is to NOT ACCRUE NEW DEBT! Don’t refinance all of those credit cards, pay off your car, then go out and max out your credit cards again or buy another car. As soon as you are done paying off your credit cards CUT THEM UP! Don’t go and close them all at once either, that can damage your credit as well. If you do want to close them, then close one every month or so. If consolidating your debt isn’t going to save you enough money to make a dramatic difference in your pocket book, then don’t do it.
Consolidating your debt using the equity in your house could be the answer. If you could save $300 – $1200 a month from refinancing your home and consolidating your bills should you? If you are comfortable with the existing payments and making good progress on paying the bills off, then you should probably stay where you are at. However if you have more money going out than coming in, take the savings!
Once you have consolidated your debt you might get a little crazy with the extra money that you now have. There are a lot of people that get accustomed to living in debt, so when the get some extra cash they blow it and get in more debt. If you are one of these people then try setting up an automatic transfer into a savings account on your payday, or make bi-weekly payments on your mortgage. Part of the trick with that saving account is that it should be something that you don’t look at every day. Some employers that offer direct deposit will allow you to deposit into two or more separate banks or accounts.
If you have to refinance and go up to 100% of the value of your house to pay off debt and keep from going in to Bankruptcy, then do it. If you can keep some equity in your home then try to. Keep in mind that if you have to sell your house with a Realtor that you are looking at about 6% in Realtor fees. You will also want to make sure that you don’t have a pre-payment penalty on your loan. That could eat up six months of interest as well. Granted you could try to sell your house yourself and you might get lucky and sell it fast, but usually For Sale by Owner homes take some time to sell. It might be worth trying if you have time on your side.
The industry standard is also changing rapidly because of all of the bankrupt mortgage companies and foreclosures going on. The type of loan that you could get last year might not exist this year. If you have damaged credit you will be looking at much stricter guidelines set by lenders. There used to be programs out there that allowed risky credit borrowers to get 100% financing with a 560 mid credit score, not anymore. Now you are looking at a 620 mid credit score for that same program.
Take control of your debt, don’t let it control you!