Did you know that approximately 80% of Americans have debt? Good debt can help build wealth or increase creditworthiness over time. Bad debt, on the other hand, does nothing to improve your financial situation and can become a major burden, especially if there’s high interest attached.
Consolidation loans are designed to help people pay off high interest debt and save money. While they can be beneficial in some situations, they should be approached with caution. In this article, we’ll discuss some of the pros and cons of mortgage consolidation loans.
Types of Loans for Consolidating Debt
The goal of any consolidation loan is to lower the total cost of your monthly payments. There are different types of loans that can accomplish this. These include:
- Personal loans
- Cash-out refinance loans
- Home Equity Line of Credit (HELOC)
- Home equity loan
Which Option Is Right for Me?
A personal loan is a good option only if the rate on the loan is lower than the combined interest rate of your existing debt. However, most of the time, people will only resort to personal loans when they cannot obtain a HELOC or cash-out refinance. This is because personal loans have higher interest rates.
The other options are cash-out refinance loans, home equity loans, and HELOCs. A cash-out refinance allows you to take out more than your existing mortgage and use the cash to pay off debt. However, if your primary mortgage is already at a good rate, you may not want to refinance. In this case, your best option may be a HELOC or home equity loan.
Advantages of Debt Consolidation Loans
The main advantages of debt consolidation loans are:
- You can save money by lowering the interest rate of your existing debts
- You may be able to pay off your debt faster
- Consolidating your debt may improve your credit score
Disadvantages of Consolidation Loans
The main disadvantages of debt consolidation loans are:
- They are associated with a high rate of failure
- If you run up your debt again, you may not be able to afford your monthly mortgage payment, which could result in foreclosure
- Refinancing involves resetting your loan term, which could increase the amount of time that you pay interest
The key takeaway here is that mortgage consolidation loans work best when they’re used responsibly. Remember, just because you’ve freed up your credit card doesn’t mean you can max it out again. You still have to pay back any money you owe. We recommend discussing your options with an expert so that you know the benefits and risks involved with each option available to you.
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