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Consolidate Debt and Pay Off Credit Cards as Soon As Possible.

Many people opt to consolidate debt in order to eliminate high-interest loans and credit card debt. Instead of making multiple payments to various lenders, consumers take out a new loan and rollover all debt into that loan. Depending on the amount owed, consolidating debt into one loan can save a significant amount of interest over the long-run.

For homeowners, there are three ways to consolidate debt. These include cash-out refinancing, home equity loans, and home equity line of credit.

Cash-out financing is best suited for homeowners who have built-up equity in their home. When homeowners use cash-out financing to consolidate debt, a new mortgage loan is created. The new loan pays off the balance of the first mortgage and provides the homeowner with cash to pay off credit cards, unsecured loans, student loans, medical expenses, etc.

Since cash-out financing creates a new loan, homeowners could potentially end up paying considerable more for their home. For example, the homeowner's original mortgage was a 30-year note. They have paid on the loan for 15 years and owe $100,000. They take out a new 30-year note for $175,000. The $100,000 balance is paid in full, leaving the homeowner with $75,000 to consolidate debts.

The homeowner uses the money to pay-off all outstanding debt. However, they will be indebted to the mortgage lender for an additional 15 years. Before engaging in cash-out financing, it is imperative to crunch numbers and determine the true cost of extending the terms of the mortgage note.

The second option to consolidate debt is obtaining a home equity loan. This type of loan requires homeowners use the equity in their home as collateral. This can be a risky venture for homeowners who are already struggling with finances. If the homeowner defaults on the home equity loan they could potentially lose their home to foreclosure.

The third way to consolidate debt is through the use of a home equity line of credit (HELOC). This type of loan provides homeowners with a line of credit which can be accessed at any time. For instance, if the homeowner has $75,000 in equity, the bank may offer them a $75,000 credit line.

Home equity line of credit loans are usually charged a higher interest rate than cash-out financing or home equity loans. However, interest is only charged on the amount of money withdrawn from the account.

Although the debt consolidation methods above are limited to homeowners, people who do not own a home can use other methods to reduce or eliminate their debts. These can include credit counseling, debt settlement, budgeting and bankruptcy. However, bankruptcy should be used as a last resort after all other methods have failed.

There are many organizations available to help consumers regain control of finances. However, careful consideration should be used when retaining the services of debt negotiation or credit counseling services. Unfortunately, there are unscrupulous people who prey on desperate people. Engage in due diligence and conduct research before handing over money to anyone claiming they can reduce or eliminate debts.

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Published on September 30, 2008 at 10:17 PM

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