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Debt Consolidation Without Home Equity

By Gina Pogol
Mortgage Credit Problems Columnist


Homeowners' debt consolidation options have been limited lately--lenders have increased home equity requirements while homeowners have seen their property values drop. So if you don't have 25% home equity, how can you start a debt consolidation plan? Depending on your position, there are four options:

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1. FHA Cash-out Refinance. FHA does allow cash-out refinancing to 85% of your home's value. So if you have a little equity, and you have been paying your bills as agreed for the last 12 months and have no recent bankruptcy (within 2 years) or foreclosures (within 3 years), you may qualify for an FHA mortgage refinance. Use the cash to pay off your highest interest debts and free up some cash each month. Get home equity and cash-out refinance offers from several lenders by filling out the form on this site.

2. Balance Transfers. If you are lucky enough to get a credit card with a low introductory rate, transfer your highest-interest cards to it and accelerate your debt repayment. Make sure that the transfer fees don't eat up your savings, and use the introductory period wisely and pay as much debt down as you can while the interest rate is low.

3. Debt Management Plans. Find a reputable firm and get into credit counseling. Not only can you get help with budgeting and credit use, but these services can negotiate lower interest rates from your creditors and let you make one monthly payment. For a nominal fee, the service takes your one payment, splits it, and pays all of your credit cards each month.

4. Equity Sharing Mortgage Refinance. This is a new financial product that can allow you to access your home's future equity. Here's how it works. Assume your home is valued at $300,000 and you take a 10% advance, or $30,000. If the house sells seven years later for $350,000, the equity sharing company gets $55,000--$30,000 in repayment and half of the $50,000 of property appreciation. If the value is flat after seven years, the equity share company only gets its $30,000 back.

If the house's value decreases by $50,000, you only owe the equity sharing company $5,000, because you share equally in the depreciation of the home as well as the appreciation. Homeowners can terminate the agreement at any time, but a fee equal to 25% of the advance payment is charged if the agreement is cashed out in the first year; the penalty drops 5% each year until there is no penalty after five years. You must continue to maintain the property, pay taxes, insurance, and your mortgage on time, and not refinance without permission.

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