Debt Consolidation

“Taking control and lowering your monthly payments by consolidating your debt!” is a phrase that appeals to anyone who feels buried alive in debt.  Anytime a person feels as if they can lower their monthly payments they jump to the opportunity.  There are more people in the world that suffer from debt than one would think. 

In the United States alone, the average American household debt is up to nearly $8,000 per family.  When human beings are in a stressful situation they will do one of two things, they will either run from the situation or fight the situation.  Often times when we think of our financial situations becoming out of control, the first reaction is to fight the situation.  More often than not, it is a good idea to fight a financial situation rather than run from it.  In saying that, most people will immediately think “I will consolidate my debt”. 

Believe it or not, there are some cons associated with debt consolidation.  Summed up, debt consolidation is the process of rolling your short-term debt, like credit cards, car loans, and other high-interest debt, into a loan with one monthly payment, such as a home equity loan.  When rolling your short-term debt, you must make an intelligent decision as to how you plan on doing this.  Everyone has received the credit card offers in the mail stating that you can roll your debt over to their card to relieve some of the interest that you are paying on your current card or cards. This can be an effective tool if used wisely but there are some disadvantages to take into consideration. 

The initial “AMAZING” rate quoted to you can be changed if you have less than perfect credit.  There are often times hidden transfer fees or set up fees that are very vague in the initial offer.  And the worst is if you fall behind just once, you can bet your next paycheck that that initial great interest rate will jump by the teens.  There are other methods of transferring your debt other than using credit cards to roll over to.  You can also use your home to your advantage by taking home equity loans and cash-out options. 

Both of these are good ways to access money that it technically already yours tied into your home.  Again there are some cons to this option as well as these options are tied into home.  If you defer from your payments and become in trouble again, they can take your house as collateral.  Before jumping into these loans, you must make 100% sure that this is something that you are ready for.  Refinancing your house is not free either.  When you take one of these options you will be required to refinance your house.  When doing so, the bank will add the refinance charges to the back end of your mortgage and you will pay on that now as well.  The average refinance charges can be calculated in many different ways depending on the lender. 

Always keep in mind that you will pay for a Mortgage Application Fee, an Origination Fee, Attorney Fees, Title Search and Insurance Fees, possibly a Prepayment Penalty, and an Appraisal Fee.  All of these variables can add up to the thousands when refinancing.  No matter which option you choose to help you get out of debt, always remember to weigh all options before taking the plunge.  Getting out of debt has, and never will be a bad decision on the part of someone in financial difficulties, as long as you dot your I’s and cross your T’s.