Is It time For Debt Consolidation?

A debt consolidation loan is a loan that uses the equity that you have in your home to pay off your unsecured debts. It allows you to get out from under your credit card debts, reduce the amount of money that you pay each month to creditors, and reduce the interest rate that you pay on your unsecured debts. However, while debt consolidation can be a great way to reduce your monthly payments and interest rates, it is not a risk free solution to your debt problem.

Debt Consolidation Options

When you take out a debt consolidation loan you will usually have the option to refinance your home under a single loan or to take out a 2nd mortgage. The interest rate that you pay on your debt consolidation loan will greatly rely on whether you take out a 2nd mortgage or if you refinance your home. If you take out a 2nd mortgage on your home then you will be charged a higher interest rate then if you refinance your home. If you don't think that you will be able to cover the increased mortgage expense created by the refinance or the 2nd mortgage then you should not use a debt consolidation loan to pay off your credit cards, as this will put your home at risk of foreclosure. Before you apply for a debt consolidation loan you need to determine if the risks and expenses involved are worth its potential benefits.

How Do You Qualify for a Debt Consolidation Loan?

In order to qualify for a debt consolidation loan you will need to meet basic requirements. First of all you need to own your home. Secondly you need to have earned enough equity in your home to cover the unsecured debt that you want to pay off, as well as cover your closing expenses. Finally you will need to meet the credit rating requirements that the lender has.
 
There are several lenders that offer debt consolidation loans to people with less than perfect credit. If you have credit problems and want to apply for a debt consolidation loan then you should know that you will still need to meet minimum credit score requirements, and you will be charged a higher than prime interest rate. If you have a good credit score then you will be offered more debt consolidation loan options and you will be offered much better interest rates.

How to Determine If It’s Time to Consolidate Your Debts

While debt consolidation loans are a good option for a lot of people, they are not right for everyone. Before you apply for a debt consolidation loan you need to evaluate your situation. First of all you should determine if you have enough equity in your home to qualify for a debt consolidation loan. If you have just bought your home in the last five years then you probably don't have enough equity to make a debt consolidation loan a viable option. However, if you bought your home in the last five years and your home's value has escalated, then you may actually have accumulated equity based on the home's increased value. In this case a debt consolidation loan may be a good option. In addition to evaluating your home's equity you will also want to look at how much unsecured debt you have, how much the closing costs will be for the loan, and how much the debt consolidation loan will increase your mortgage expense each month. If you have a lot of unsecured debt, enough equity in your home to cover your debt total, and if you can afford the increase in your mortgage payment(s), then consolidating your debt using a 2nd mortgage or by refinancing your home is a viable option for you.