This is a strategy for those homeowners who would like to use some of their home equity to consolidate debt. The purpose is to lower monthly debt payments so that it is easier to pay your bills.It is important that you realize that by consolidating debt you are not actually reducing it. You may hear advertisement on the radio offering refinance loans to 'eliminate debt'. The fact is, you are increasing your debt. When you refinance your home, you will have to pay closing costs for the new mortgage, which are usually added to the loan balance. However, the interest rate you will receive on your mortgage will be far lower than on your high interest debt, so you will pay less each month in interest.
If you don't have enough equity in your home to consolidate the debt you have you may want to consider refinancing to a mortgage that has lower payments. A Pay Option ARM may be a good choice for you. One of the many features of this loan is a low minimum payment based on around 2%; this can usually save you around 40% of a traditional 30 year fixed payment. The huge additional savings can be used to pay off those additional debts.
There are many different program choices and loan types that you can use to reduce your debt with the equity in your home. One of the most common choices is through the use of a HELOC, or home equity line of credit. Many times the interest on a HELOC can be tax deductible and the rates are much lower than those of credit cards. Consolidating your debt with a home equity line of credit can provide you with monthly savings and possible tax deductible interest. You should consult a tax adviser or accountant to discuss the tax deductibility.
Once you have reduced your monthly debt payments, it is important that you don't rush out and max out your cards again, buy a new car, or otherwise incur more new debt. The idea of reducing your debt is not so that you can gain more debt, it is so that you can have greater cash flow, and pay off the debt that you already have.
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