by Alden Smith
Today, with the pain at the pump and in the grocery aisles, people tend to use whatever method that they can to keep afloat. Because wages don’t rise in pace with gasoline and food, it sometimes becomes necessary to use a credit card when you know you really shouldn’t. Before you know it, you have racked up a huge debt with the credit card company, even though you haven’t spent foolishly. Considering a debt consolidation loan that is tied into your existing mortgage is an option for relieving yourself of excessive debt. First, though, there are considerations you need to be aware of. We discuss them here.Considering A Debt Consolidation Loan
Who should consider a debt consolidation loan? Much of this depends on your credit score, and your history of bill paying. Remember, when you get a debt consolidation loan, the debt doesn’t just disappear – it is transferred in to your most important asset. Average credit card debt among all American households is $8,400. Average per household debt in the U.S., not counting mortgage debt, is about $14,500. The typical American family has between 5 and 10 credit cards. It is a known fact that with the way the economy is now, people use their credit cards for more purchases than ever before. Before we know it has happened, we find ourselves mired in debt. A debt consolidation loan makes perfect sense to you now. But does it?
The worst Case Scenario
Let’s say, for example, that you have a home for which you paid $145,000 dollars. You made a down payment of 10%, or $14,500. Because almost everything you pay in the first few years of owning a home is interest, your home equity will not be large. You paid a down payment of 10%, or $14,500, and you got a good rate of 5.75% on a 30 year fixed mortgage. You have acquired more credit card debt at a high rate of interest than you feel comfortable with so a debt consolidation loan would bail you out, and give you just one payment to pay each month. From the information above, we see that average debt is $14,500. When you refinance for the sake of a bill consolidation loan, you effectively take away the down payment, plus interest rates as of this writing are 6.297%, more than your original rate. You have erased that $14,500 in debt, but in the process, have taken away your down payment, and will now be paying for that excessive debt for 30 years, at an interest rate higher than you had before the debt consolidation loan.
In Conclusion
Not all debt consolidation loans are a bad idea. They can bail a person that is mired in debt out of a bad situation. They can also put you in a position where you may never get out of debt, and, worse, make your home mortgage more than your home is actually worth. Consider a debt consolidation carefully before taking this step.
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