A debt consolidation loan is essentially a cash out
mortgage loan or home equity loan, which is used
to pay off high interest debts
with a lower fixed payment. Fixed rate mortgage loans are amortized to be
paid
off at the end of the term.
Consolidation mortgage loans are
designed to save more money by converting high
interest rates, and daily compounded interest on credit cards,
and other debts, into a lower rate loan with
simple annual interest. Save from tax deductible
interest when a loan is placed on an owner occupied
residence. Another option could be an FHA loan, with up to 85% cash out.
Here's a loan example: $40,000 of debt at an average
credit card rate of 15%, might have a payment of about $560
per month, when amortized over a 15 year loan term. A consolidation mortgage loan term at 8% would have a payment of about $382 over the same
time period, which could save
$178 per month. If your goal is pay off your debt as soon as possible, the loan
term could be reduced to about 8 years by applying the monthly savings to the
loan payments.
In addition to
reducing your rates, eliminating compound interest
can add to
your total monthly savings. In this example, you may save another $50 per month
by converting to a simple interest mortgage loan, instead of making
minimum payments on credit cards. It's possible that daily
compounded interest on credit cards can accumulate to more than the minimum
monthly payments, which can result in paying interest on the accumulating interest.
Consolidating debts into a fixed rate mortgage loan can help eliminate the
never-ending minimum payment cycle.
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