Debt consolidation loans work by getting a cash out
refinance or a home equity loan, which is used to pay off bills or consolidate high interest debts
into one low rate mortgage loan. A fixed rate debt consolidation loan is fully amortized, meaning
off at the end of the term. Options may include zero points, bad credit programs, FHA loan, 5 year ARM, 15 and 30 year fixed rates.
Home equity consolidation loans are
designed to save money by converting high
interest rates and compound interest into a lower rate with
tax deductible simple interest. Saving on a tax deduction
may be possible when a consolidation loan is placed on an owner occupied
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. Even if a debt consolidation loan rate was 8%, the payment would be 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
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 consolidation 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 loan can help eliminate the
never-ending minimum payment cycle. After loan documents are signed, you have a 3 day right to cancel if you change your mind.