The Pros And Cons Of Debt Consolidation

The next method to getting on the path to financial security is debt consolidation.  This requires the help of a loan officer of loan originator.  The difference between the two are not much other than that one works at a bank such as Bank of America and the other works for a lender such as Countrywide.  If you know someone in the business I would start there.

How it Works?

With debt consolidation you can take your outstanding debts such as your credit card balance, HELOC ( Home Equity Line Of Credit ), or even a personal loan and combine them into one loan.  Usually into your mortgage simply because it is your biggest debt with the lowest interest rate and some other benefits I am about to discuss.

Advantages

1.  Loan interest rate is usually much lower.  Unless you have terrible credit history getting a lower rate is the biggest advantage here.  If you’re paying high interest rates on your credit cards this could be an attractive option for you.  Bringing your rates down to around 6% on a home loan can save you a lot of money in interest payments.

2.  Credit rating is not negatively affected.  As with bankruptcy and consumer credit counseling, debt consolidation has no effect on your credit score.  With this option keeping you score in good standing is not an issue unless you already have bad credit.

Disadvantages

1.  Debt is secured by collateral.  In most cases it will be real estate itself.  Although this secures the debt it also puts the asset at risk if the borrower would happen to default on the loan.  This has the potential to put you in an even worse position.

2.  Reloads there debt back up.  This is one of the worst reasons you may not want to consider this option.  If you are terrible with money and can’t be trusted with a credit card then you may want to rethink this option.  The worst part is that within two years most people who do consolidate will end up reloading there credit card with just as much of more debt than before.  Not good.

3.  Does not actually eliminate your debt.  Just because your credit cards are cleaned up and everything is combined into one simple payment doesn’t mean you have eliminated anything.  All you have done is shifted the debt from one bucket to another.   Essentially just putting it all into just one big bucket.

4.  Refinances have tougher guidelines.  With the recent foreclosure issues lenders have put down tougher guidelines for those that are looking to refinance there current mortgage.  If you have a high debt to income ratio lenders may be reluctant to take you on.

Finally,  with all the issues with pursuing this options if you have terrible credit and a high debt to income ratio you won’t even be able to take advantage of this option anyways.  If you are however think about this option carefully before pursuing.  There will be refinance closing cost , and an appraisal will need to be done.   So weigh your option carefully.

I was recently contacted several times by my mortgage lender to refinance.  They believe because of the current mortgage I have that it would be to risky for me to have.  So naturally once I receive enough mail from them I decide to call my mortgage advisor.  She explained to me that if I switched to a new fixed mortgage with the rates at current highs I would pay $300 more on my mortgage per month.

Not good.

In short the lenders are desperate.  With the record number of foreclosures the lenders are looking for anyway they can to generate some more business.  Even if that means putting the fear of god into you so  you’ll refinance.  Don’t fall for this one.  Just because some lender has talked you into refinancing and has to use scare tactics doesn’t mean he is always right.  Think for yourself and use your own judgement.

Last but not least, have you ever done debt consolidation?  Are you thinking about it?  If you have did it work out the way you planned?  Is debt consolidation worth it?

How do you feel about debt consolidation?