There are several ways an individual can use the money borrowed against real property. Most often, a security deed (or mortgage) is given against a piece of property for the purchase price, as few buyers can pay cash for a new home. It is common practice to buy a home on credit and the majority of people have no problem making their payments each month, knowing that they will soon own their own home.
However, sometimes people borrow more than the purchase price, or attempt to refinance an existing mortgage so that cash is available to pay bills or to finance other ventures. The process of taking out a loan against the equity in a real property to pay off existing bills is called a “debt consolidation” loan.
Using Home Equity to Consolidate Debt
While not all debt consolidation loans are secured by real property, many are, due to the fact that equity in a home may be sitting “idle” while the borrower is paying a tremendous interest rate on his or her bills. Rather than borrow more money at a high rate of interest, borrowers tend to use the equity in the home, which can often be borrowed against for a very reasonable rate of interest. If a borrower is paying 12% or even 18% on credit cards, it makes sense to borrow enough to pay them off at 3% on a debt consolidation loan against his or her home. In this particular case, if the borrower does not re-charge on the credit cards, he or she will be saving a great deal of money in the long run by using debt consolidation wisely.
How hard is to refinance my credit card debt?
Most debt consolidation loans have very strict requirements for qualification. People with very poor credit cannot usually qualify for these types of loans, although there are program for those with marginal credit or “average” credit to help consolidation bills. Those who have managed to keep up their payments will be the most successful in securing debt-consolidation financing, since the ability to pay monthly bills indicates that the borrower will have no trouble making the new, smaller monthly payments associated with the debt consolidation loan.
Many mortgage lenders put limits on debt consolidation loans or ask for specific actions not associate with other types of loans. For example, many lenders specify that borrowers must be willing to close existing credit accounts and must agree not to open new ones. In these types of loans, the lender usually cuts checks directly to the creditors rather than passing money through the borrower, to be sure that the entire balances are paid. The lender takes care of paying off the bills for the borrower, and may require the borrower to sign something to allow his or her accounts to be closed after payment.
Many lenders also have restrictions on the types of debts which can be paid with a debt consolidation loan, and may not approve the loan if the borrower’s specific debts do not meet these requirements. Further, some lenders will not make a debt consolidation loan unless the total amount owed is above a certain level. Of course, the borrower must have enough equity in the home used for security to justify the extent of the loan, as well.
Is mortgage refinancing to pay off my credit card debt a good idea?
For some people, debt consolidation loans are a good idea. If you have simply overextended yourself and want to quickly pay off your existing debts, you might consider a debt consolidation loan as a means to help you do this. On the other hand, debt consolidation loans require self-discipline, since it is often easy to get back into the same financial position within a short time.
The worst mistake someone can make with a debt consolidation loan is to see it as a “cure” for overspending. While this may sound silly, unfortunately many people do just that! It is common for a borrower who has spent heavily to tap into the equity in a home until he or she can no longer make the payments, and foreclosure follows. It really is possible to lose your home simply by charging too much on credit cards over a long period of time, then trying to repair the damage with a new mortgage plan.
Fortunately, most people are able to control spending before it reaches this point. If you are considering a debt consolidation loan, try to set a goal to pay more than the minimum payment each month. This will allow you to pay of the loan even more quickly, and you will soon begin to enjoy the feeling of being debt-free!
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