Debt Consolidation Can Help Now. What's the Long Term Fix?
By Karen LawsonMortgage Credit Problems Columnist
Like many homeowners, you're concerned about the amount of debt you have. Cash-out mortgage refinancing, home equity loans and customized debt consolidation programs may consolidate your debt into more manageable payments, but your overall goal should include a debt management program that helps prevent bad credit. Consolidating debt can lead to bad credit if you don't establish a household budget and control credit spending.
Debt Consolidation Options: Refinancing and Home Equity Lines of Credit
Current economic conditions are causing lenders to tighten their credit requirements for loans. Bad credit mortgage loans for debt consolidation include refinancing and a home equity line of credit (HELOC) may be available if you have sufficient home equity.
Refinancing: You'll borrow enough in one mortgage loan to pay off your existing mortgage and your consumer credit accounts. These can include credit cards, car loans, medial bills and personal loans..
Advantages of refinancing include rolling all of your debt into one mortgage loan with one payment. Mortgage loans often provide lower interest rates than other bad credit loans. Potential disadvantages include higher fees for cash-out refinances, reduction of available home equity, and prolonging repayment of consumer debt which can increase finance charges you'll pay over time.
Home Equity Line of Credit (HELOC): The idea is to borrow enough to repay consumer credit debt. HELOCs are mortgage loans that are secured by your home. Advantages of HELOCs typically include interest rates substantially lower than consumer credit rates. Payment terms may permit paying interest only, or making no payment at all. (Actual terms vary according to individual circumstances). As with refinancing, HELOCs have potential disadvantages including prolonging repayment and reducing home equity.
Debt Management: Preventing More Bad Credit
The most serious disadvantage associated with any debt consolidation loan is the possibility risking more bad credit. This can happen if you resume using credit after consolidating your debt. You'll owe more in mortgage loans and owe consumer debt if you carry balances on credit cards after consolidation.In addition, if you close out the cards (sometime a requirement of debt management plans) you may drop your score because you will have less available credit and if you had a good payment history you it will carry less weight when closed out.
Debt management is essential to successfully eliminate debt. Establishing a cash-based household budget, eliminating non-essential spending, and making regular contributions to household and long-term savings are important parts of a managing debt. Consulting a non-profit credit counseling agency or financial advisor can assist with improving bad credit.
About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.
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