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Juggling multiple debts is rarely easy. With various interest rates and mounting balances, sometimes the bills become unmanageable. Fortunately, there are options that may help you regain control over debt if you find yourself in that situation. Debt consolidation combines multiple debts into one monthly bill with a fixed interest rate. You could use a few different tools to consolidate debts, including personal loans, lines of credit, credit cards, and refinancing your home. Read on to learn about your options for streamlining your debts.
Understanding debt consolidation
“Debt consolidation” usually means combining multiple debts into one by taking out a loan and using it to repay each individual debt. Credit card bills, personal loans, car payments, and mortgages could easily become overwhelming. Debt consolidation streamlines your finances, so you don’t have to keep track of multiple due dates and interest rates. Ideally, your debt consolidation loan should have a lower interest rate than the debts it’s replacing, like high-interest credit card bills.
Exploring debt consolidation options
Personal loans
Many financial institutions offer personal loans designed for debt consolidation. These products are fairly straightforward: you borrow a large enough sum to cover your outstanding debts. Instead of juggling multiple bills, you repay one personal loan in monthly installments. Debt consolidation loans are often unsecured, which means you don’t have to provide any collateral. However, that usually means you must have a strong credit score to qualify for the best possible interest rates. To take out a debt consolidation loan, you may have to pay some fees, such as a loan origination fee. Be on the lookout for debt consolidation loan scams, which are somewhat common. If a loan seems too good to be true, it’s likely not a safe option.
Balance transfer credit cards
If you’re struggling with credit card debt, you may be able to move your balance from a high-interest card to a low-interest balance transfer card. You can also use balance transfer credit cards to cover other debts, like personal loans.
Credit card issuers often offer low-interest introductory promotions for balance transfer cards. For a set period—usually a year or more—the credit card may have a low APR or no APR at all. To save as much money as you can, try to pay off as much of your balance as possible during that period.
Any balance that remains on the card after the promotional period ends begins accruing interest at the standard rate. Balance transfer cards typically charge a one-time transfer fee—usually a percentage of the amount transferred.
Mortgage refinancing
If you’re a homeowner who has managed a mortgage for a while, you may be able to leverage your equity to consolidate your debts. Mortgage refinancing means taking out a new mortgage and using the payout to repay your original mortgage—and, potentially, consolidate other debts. Like other debt consolidation options, refinancing would ideally offer a better interest rate and more favorable terms for your situation. However, it’s not always the best fit—mortgage refinancing comes with strict eligibility requirements, costly fees, and risk.
Refinancing as a debt consolidation strategy
You can use mortgage refinancing as a debt consolidation strategy for high-interest debts through what’s called a “cash-out refinance.”
While standard refinancing involves taking out a new mortgage with more favorable terms to pay off your existing mortgage, a cash-out refinance allows you to borrow more than your remaining mortgage balance by tapping into your home’s equity. To find your equity, subtract your mortgage balance from the total value of your home.
Typically, most of your new mortgage would still go toward your home. But the remaining cash can be used for additional debts, like credit card and auto loan bills. Home refinancing rates are often lower than other types of interest, so this type of refinancing could save money. Like other forms of debt consolidation, mortgage refinancing simplifies your finances. This strategy could also extend your repayment term, lowering your payments.
Refinancing also offers a distinct advantage over some other types of debt consolidation. You may be able to deduct the interest you pay on your mortgage from your taxes. During tax season, this small perk could have a big impact.
Evaluating the costs and risks
While refinancing your home could help you consolidate debts, it’s not always the best option. Understanding this refinancing strategy’s disadvantages and risks can help you make the right decision for your budget and financial future.
- Fees – Mortgage refinancing comes with closing costs. Lenders typically charge a percentage of the new loan amount to cover a variety of fees. That means borrowers should be prepared to pay thousands of dollars for refinancing.
- Risk of losing your home – Cash-out refinancing loans are backed by your home as collateral. Defaulting could mean losing your home. It’s important to weigh this risk against any unsecured debts you may be consolidating.
- Reduced home equity – Home equity offers financial security. By reducing your home equity, you could shrink your family’s safety net, especially if you don’t have many additional assets.
- Potential higher cost – While refinancing your mortgage could help you reduce your interest, it may not save you money in the long run. Monthly payments may increase because of the added debts. If you extend your term to offset the cost, you could ultimately pay more in interest.
Refinancing your home or using another debt consolidation tool could help you regain control over your debts and make your bills more manageable. However, refinancing doesn’t make the debts go away. To maintain your financial security, develop a plan for repaying debts. Credit habits like paying more than your monthly minimum and keeping your balances low could help you strengthen your financial well-being.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.
