A debt consolidation loan pretty much says what it is- it’s a loan that consolidates outstanding debt. But why is now a good time to look into one? There are several reasons but mostly it’s about the current state of the interest rate environment. If you haven’t noticed, mortgage rates are near record lows. One year ago, the average 30 year fixed rate hovered around 4.50 percent while Freddie Mac’s most recent survey reported the 30-year rate is 3.75 percent. There are many who may have looked into refinancing several months ago but decided against it due to the then-current rate environment, but rates have kept drifting lower. The 15-year term also experienced a year-over-year fall from 4.0 percent to 3.2 percent. For many, refinancing an existing mortgage can make a lot of sense.
But when the decision to refinance is made and there are other monthly credit obligations, it might make even more sense to roll some of that outstanding debt into the new mortgage. After all, of all interest rates offered today in credit markets, it’s the mortgage rate that sits at the bottom. Credit card debt, auto loans, student loans…all can be fair game with a debt consolidation loan.
Take your average credit card. The rate on those cards can range anywhere from 13.9 percent to as high as 20.0 percent, depending upon the credit profile of the cardholder. Compare 13.9 percent with the 4.0 percent rate you can get on a new mortgage. Automobile loans are much lower compared to credit card debt but can still hover around 4.50 to 5.0 percent. Any outstanding credit balance can be looked at to see if it makes sense to roll that outstanding balance into a newly refinanced home loan. But with any outstanding credit card or other consumer debt, continuing to charge on a recently paid off credit card doesn’t do much good if the balance and payments show up again.
If it makes sense to stand pat and not refinance, you can also take out a second lien to pay off consumer debt. A second lien sometimes referred to as a junior lien, is a standalone mortgage that subordinates to the existing home loan. Rates for a second debt consolidation loan will be slightly higher compared to what’s available with a first lien mortgage but can still be lower than other types of consumer credit. In addition, the loan term for first and second liens are stretched out over a much longer period, keeping payments lower even more. One note here, while monthly payments fall, extending debt over 10, 15 or 30 years will result in more long term interest paid.
When deciding whether or not to refinance an existing mortgage, the most obvious thing to consider is comparing the rate on the existing mortgage with current market rates. If rates are lower today than what might be on someone’s mortgage, then it would be wise to speak with your loan officer and compare. Or, you may want to adjust the loan term at the same time by refinancing out of a 30-year loan and into a 15-year term. The shorter loan term will save on long term interest, but monthly payments will be higher as a result.
If it does make sense to refinance and there are some outstanding credit balances, see what your new monthly payments would be by rolling in some or all available consumer debt. You can pull your own credit report once per year by visiting a site supported by the three main credit repositories of TransUnion, Equifax, and Experian. This site is at www.annualcreditreport.com. This report will give you a general idea of your credit standing and is called the Vantage report. Mortgage lender, however, use FICO scores. They’re very similar but if you want to see what the lender sees you’ll need to make a direct request and an application at your mortgage company. Some debt consolidation programs require a slightly higher score compared to a traditional “rate and term” refinance loan.
If you’re not sure what the interest rates are on your various accounts, simply contact the creditor either by phone or online and check the rate you’re paying. Make note of that rate along with the balance and let your lender know what the various rates are on each account. Your lender can then run some numbers to see if eliminating consumer debt with a debt consolidation loan makes good financial sense for your situation.
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