There are two main considerations when looking for the best way to consolidate debt. Most financial services professionals will offer the solution that makes the most sense for them, whereas the borrower (you) need to determine whether it makes financially in terms of how much you save in interest and how much you can increase your monthly cash flow. Both objectives are seldom met and as a result borrowers need to prioritize how they repay their debt, even if it not always the best way to consolidate debt. The options presented here allow borrower to achieve both -- reduced interest costs and improved cash flow. Other alternatives will be reviewed elsewhere.
Without question, the best way to consolidate debt involves using home equity. Provided the borrower has enough equity, he or she can secure a Home Equity Line of Credit, can refinance an existing First Mortgage, or can obtain a second mortgage. Since rates given on credit that is secured are by far much more attractive than unsecured rates, using home equity is clearly the best way to consolidate debt. These three options will be discussed in greater detail here.
1. Home Equity Line of Credit. While using a Home Equity Line of Credit (HELOC) is not the best way to consolidate debt, it ranks quite high since it offers substantial flexibility. In particular, repaid and unused credit under a HELOC can be accessed by the borrower. As well, rates on a HELOC are almost always prime-based and with prime as low as it has been, it has certainly been advantageous for borrowers to use this option. Another key benefit to a HELOC is that the minimum monthly payments are quite low, allowing borrowers to improve their cash flow while simultaneously enjoying the lowest rates available (today).
2. Refinancing a First Mortgage. This is clearly the best way to consolidate debt in almost every situation. Although there can potentially be penalties and fees to break an existing mortgage term, borrowers should evaluate the savings over their existing debt situation and consider how much they will save over the life of the debt. This can be measured as simply as finding the difference between interest rates and can also be measured by reviewing the monthly cash flow savings. With First Mortgage rates quite low, especially now, borrowers will not only benefit from exceptionally low credit rates, but from a much lower, single monthly payment. As the best way to consolidate debt, the First Mortgage option does have a fairly large drawback; the consolidated debt erodes the equity previously available in the home.
3. Obtaining a Second Mortgage. Second mortgages often come with rates that are lower unsecured credit rates. Second mortgages can sometimes have low monthly payments (often interest-only). However, it is unlikely that a Second Mortgage will ever be the best way to consolidate debt for any borrower. In cases where equity is slim or the borrower's income cannot be properly substantiated, or where the borrower cannot obtain a refinance or HELOC through their original lender, then a Second Mortgage becomes a viable option. While the savings in terms or interest costs and monthly cash expenses might be minimal, they often better than any of the unsecured alternatives.
People who are looking for the best way to consolidate debt need to review their secured options first. Secured rates and terms will always be better than unsecured alternatives on two fronts. One, the rates will be significantly lower. Two, secured repayment terms are normally lower on account of longer amortization periods and lower rates. No matter what option borrowers choose, using the equity in a home is always the best way to consolidate debt over the long term.
About the Author:
With over 10 years of mortgage-specific experience, Julie Hammond has been helping thousands of borrowers save money with their debt. She is regular contributor to the Nevada Mortgage website, which provides visitors with details specific to Nevada's Mortgage industry. Please visit the site at Best Mortgage Nevada (dot) com.
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