Debt Consolidation Blog

When used correctly that consolidation can be a wonderful thing. It allows you to take high interest loans and replace them with low-interest loans. This means more of your money will be going toward principal and less of it toward interest. Sounds like a good thing all around right? It is if you continue to make the same payments you made under the higher interest loans.

What gets people into trouble is when they use that consolidation as a way to increase their spending. Your goal should be to lower the amount you are spending focusing more of that money on the principle and less on the interest. If you take payments that totaled $1000 per month, and replace them with a single loan that costs $500 per month it puts you in a better financial situation. However if you use that extra $500 per month to increase your standard of living or spend money on items that may have maintenance costs, you can work yourself into a worse situation than what you started with.

The wise thing to do with the extra $500 per month is to put some into an emergency savings account and the rest toward paying off your debt. The emergency savings account will help keep you from needing to go into debt again for unexpected expenses. The extra money being paid toward the principal of your loan we’ll help you get out of debt more quickly.

Debt consolidation loans are great for people who are willing to change their behaviors that lead to the data in the first place. Debt consolidation loans are very dangerous when they allow people to continue a pattern of behavior that needs to be changed.

In the US it is easy not to take that seriously. Bankruptcy gives people an easy way out if they are unable to pay their bills. For all their problems debtors prisons did one thing right. They made people take their debt obligations seriously. I’m not against bankruptcy laws. But I am against people doing things without considering the consequences.

It used to be that buying a house was a simple way to consolidate debt as long as you weren’t too far underwater. Banks were often willing to loan of 125% of the appraised value of a piece of property. So if a piece of property appraised for $100,000 they would loan me $125,000 to buy it. If you were able to purchase the house for $50,000 that would put $75,000 in your pocket at closing.

Obviously this wasn’t very effective if you were so far in debt to the bank will loan you money in the first place. But during the housing boom house prices were expected to continue going up. Many banks assume that they could always sell the property for at least what they have loan.. That assumption turned out to be false as many banks are finding out.

Banks are now being more careful and there are many new rules they must follow. for instance if the selling price is lower than the appraised value they must use the selling price as the value of the house for determining the loan. This means that they normally can’t loan new extra money based on equity in order to fix up the house or take out cash. Conventional mortgages will generally only loan you 80% of the lower of the selling price or appraised value.

These new rules go a long ways toward protecting the bank. If you need to cash out equity on your house this can still be done but you must wait six months after you purchase the property area once the six-month period has gone by you can refinance using the appraised value of the house instead of the selling price.

This can be a very easy way to roll high interest credit card debt into a low interest mortgage. Obviously you need to be careful not to over extend yourself. But with credit card interest rates going up in mortgage rates at the lowest point in years there may be some opportunities to switch to lower interest levels.