Alternatives To Debt Consolidation
So the question is, what can you do if you have a lot of debt?
Chapter 13 Bankruptcy
Yes, technically, Chapter 13 bankruptcy is a debt management plan. Its court-ordered, though, so your creditors dont get to decide if they want to offer it to you or not. Many experts consider bankruptcy a last resort, and it definitely wont help you buy a home because your credit will take a hit.
However, if a DMP cant get you out from under your debt in five years or fewer, some personal finance and legal experts recommend it.
One strategy is to find a mortgage program which has a higher DTI limit. There are some programs out there that allow a 50 percent DTI. However, look twice to see if you really can afford the loan.
- Will your new housing costs rise significantly?
- Do you have emergency savings to make a payment or two if your income is interrupted?
- Do you manage your debt well never carrying balances on cards and paying every bill on time?
Some people only have one bill their mortgage and can buy more house because they avoid excess spending.
Another choice is to borrow less. This may be very plausible outside major metro areas. Or buy with a friend or relative.
While there may be ways around it, the real problem for too many cases is owing too much. Many of us need to have less debt not only because its financially prudent, but because its simply comfortable. We like to sleep better at night.
Disadvantages Of Refinancing To Consolidate Debt
This strategy definitely isnt foolproof. Perhaps the biggest drawback to consolidating smaller debts into your mortgage is that youre stretching these short-term debts over a much longer term. While the interest rate on the mortgage may be significantly lower than the rates on the credit card or car loan, the interest will be accruing over a much longer period. The general rule is longer loan term = more interest costs this is why making extra or more frequent repayments can reduce how much you pay.
You should also take into account the upfront costs of refinancing, which can set you back thousands. If youre struggling with debt, chances are you might not be able to afford these costs.
If youre experiencing financial hardship and have a poor , many lenders actually might not allow you to refinance your home loan to consolidate debts. If things have taken a turn for the worse, you can call the National Debt Helpline on 1800 007 007 to talk through what your options are.
Living Paycheck To Paycheck
Youre not alone. Canadians are carrying heavier loads of personal debt than ever before. For some of us, the cost of servicing those debts is in itself an obstacle to correcting the problem. Each month can be a chase to make the interest payments to keep the debt afloat. Sometimes, it may help to consolidate debt into your mortgage.
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Other Options For Knocking Down Debt
If you think you have the resources and discipline to knock down your credit card balances on your own within six months or so, you probably dont need to bother with a loan.
Or you might want to look into using a balance transfer cardthat is, if you think you can focus on paying it off within the required timeline to take advantage of the low interest rateand you can resist the temptation to keep charging.
But, if it feels as though your debt is becoming a slippery slope, and consolidation would help you set up a new and better payment structure for getting rid of it, you may want to consider a personal loan.
Every situation is different, but you can use SoFis personal loan calculator to get an idea of where youd stand, or you can look at some payment examples. You also can check out SoFis other benefits, including our Unemployment Protection program for members.
Consolidating debt before buying a home can be a wise first step. And if all goes as planned, when youre ready to purchase that home, you could decide to apply for a mortgage loan through SoFi.
Take control of your credit card debt with a SoFi personal loan today.
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How Closing Costs Figure Into Your Decision
Closing costs are another factor to consider before you refinance to pay off debt. Lenders and service providers charge hundreds or thousands of dollars in fees when you refinance a mortgage. That’s money that you could otherwise use to pay down debt. Compare the closing costs with the overall interest savings on the consolidated debt. You want the interest savings to exceed the closing costs.
In other words, it may make sense to spend $3,000 on mortgage closing costs to save $12,000 in interest, but not to save $2,000 in interest.
» MORE: Closing costs calculator
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A Debt Consolidation Home Loan Case Study
Liam* had multiple credit cards in arrears, with a hefty interest rate of 20% p.a.
He told me that he had racked up the credit card debt as a student. He also had a car loan at an interest rate of 7.8% p.a. and a home loan at 4.45% p.a.
Liam was finding it very difficult to meet all his commitments and felt he was on the brink of true financial hardship.
Use Your Homes Equity Wisely
Remember that you reduce the ownership percentage of your home whenever you access your homes equity. This means that youll either pay more in interest over time or youll need to make more payments before your mortgage matures.
You should never access your home equity for everyday expenses. This can quickly trap you in a cycle of debt. Instead, use your home equity for large, one-time expenses like covering medical bills or consolidating credit card debt. Consider your financial situation to make sure you can handle your new payments before you sign on your new loan. From there, stay on top of your payments and avoid falling back into debt.
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Discover If You Qualify:
- Standard home loan rates are available if we can get you approved with a major lender.
- Your repayments may be more affordable if we can secure lower home loan rates.
- You may be able to improve your cash flow and savings position.
- You may be able to reduce stress and manage your debt more effectively.
- You can prevent creditors from pursuing you for funds and protect yourself against the risk of bankruptcy.
- You will be converting your unsecured debts into secured debt, i.e. one that is secured by your home or property. That means if you cant meet your mortgage repayments, your property will be at risk as the lender can now sell it.
- Your loan term is extended over a longer period of time, so youll pay more in interest over the life of the loan. There are ways to minimise the amount of interest paid by making extra repayments once youre in a position to do so.
- By rolling other debts into your home loan, you will alter your and this could negatively impact the interest rate you are required to pay.
- If your LVR shifts above 80% as a result of the debt consolidation you will need to pay .
- There may be set up fees for a new home loan package.
What Is Debt Consolidation
Debt consolidation is the process of using one loan to pay off multiple debts. By consolidating your debts, you effectively combine several debts into a single debt source and single monthly payment. The new loan typically has a lower overall interest rate.
You can consolidate debt with either a loan such as a cash-out mortgage refinance or by transferring balances to a low-interest credit card.
First, you must identify which debts youd like to consolidate. From there, you seek out a loan large enough to pay off all those debts. Once you apply and get approved, your lender will disburse funds to you to pay off your loans. Alternatively, some lenders send your proceeds directly to your creditors. Then, you begin repaying this new loan.
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Speak To A Debt Consolidation Mortgages Expert
We offer a free broker-matching service that will pair you up with the advisor who is best positioned to handle your case. Make an enquiry or call us on 0808 189 2301 and see what a debt consolidation mortgage broker could do for you. Your initial consultation will be free and theres no obligation to take things further.
Ask a quick question
We can help!We know everyone’s circumstances are different, that’s why we work with mortgage brokers who are experts in Debt Consolidation MortgagesAsk us a question and we’ll get the best expert to help.
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The Financial Conduct Authority does not regulate some forms of buy to let mortgage.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
*OMA Mortgage Approval Guarantee is subject to you providing satisfactory documentation. See T& Cs.
Consolidating Debt Into First Time Mortgage
Current homeowners arent the only ones who are able to take advantage of debt consolidation using their mortgages. First-time buyers can also tap into the benefits that debt consolidation has to offer by rolling their debts into a new mortgage.
In order to qualify for such an arrangement, your loan-to-value ratio needs to be under a certain amount. Your LTV basically represents the size of your loan in comparison to your homes value. Lenders rely heavily on this ratio in order to better understand the risk level of a specific loan. If the number is too high, the odds of mortgage denial are also high. Generally speaking, lenders dont typically approve borrowers if their LTV is more than 80% on a new home loan.
Should your LTV be within an acceptable range and your lender agrees to let you roll your debts into a new mortgage for a new home purchase, youll be able to finally get rid of all that high-interest debt that has been plaguing your finances. Mortgages typically come with much lower interest rates compared to other types of debt, like personal installment loans, payday loans, and .
Whats the difference between personal, private and payday loans in Canada? Find out here.
Learn how to tackle your debt once and for all, check out this infographic.
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Budget Planning And Expense Tracking
Okay, this isnt a debt consolidation option, but wed be remiss not to include it! Often, rather than continuing to borrow, people can get a handle on their debt by practicing better money management skills. This includes budgeting and watching how you spend your money. You can do this online with our free, downloadable Budget Planner + Expense Tracker its easy to use and the instructions are included in the spreadsheet.
Overall Costs And Applicable Interest Rates
On this list, the online loan lenders compete against each other based on their current interest rates. You should be aware that people with bad credit loans will always have a higher interest rate than loans for people with good credit.
In short, negative credit loans are costly, so be prepared to spend more. Nonetheless, the legislation has put in place safeguards to ensure that these companies interest rates do not surpass certain thresholds. In determining our rankings, we looked at the total cost and interest rates.
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Radcred: Trusted Lender With Quick Cash Approval
You can use RadCred for whatever financial emergency comes your way. This company is capable of potentially helping you with home improvement, family vacation, business startup, unexpected bills, and other situations requiring extra funding. Above all of these, there are no hidden fees, no upfront cost, and zero obligations.
RadCred may provide an easy and convenient way for you to connect yourself with a network of lenders and receive a personal loan. This companys outstanding service might help you get a loan between $1000 and $35000. Though RadCred is not a lender itself, it will help you seek lenders fast and hassle-free.
Since the site is free for use, you can quickly check out whether youre qualified for a quick loan or not. Aside from short-term loans this company also offers flexible loans to six-year plans and has some of the best repayment terms on the market.
RadCred website works flawlessly, and the application process is speedy and easy. Every newcomer can easily accommodate, but it also offers necessary guidance if you have some misunderstandings while applying. These features and its services quality have placed RadCred at the top of this market.
RadCred offers may be suitable for borrowers with poor credit scores and those looking to consolidate their debts. It even supports loans for startup businesses which is a sporadic case since most lenders wont offer loans for companies that are still not running.
What Is A Cash Out Refinance
A cash out refinance replaces your current mortgage with a new mortgage for a higher amount and gives you the difference in cash at closing. The interest rate and term will likely be different on your new mortgage. And the amount you owe will increase since you are rolling additional debt into your mortgage balance.
You can also get a home equity loan or a home equity line of credit to pay down debt. Learn more about these different home equity loan options.
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Consolidating Debt Into A Mortgage Refinance: Will It Save You Money
Are you considering rolling debt into a mortgage refinance? It isnt the right financial move for everyone. Take these steps to compare numbers first to see if it will actually save you money.
Dear Gary,Recently a friend told me how they refinanced their home and consolidated the automobile loans into their home loan. She says they have an extra $200 each month now. Is this the way to go? We are planning to sell our home in the next two to three years. Our friends who did this just moved into their home a year or two ago.Thanks,Michelle
Wow, thats a lot of money! If someone offered me $200 a month, Id take a look at it, too! And spurred on by ads promising that you can save by borrowing your home equity, many people are considering this type of loan.
What Is A Debt Consolidation Mortgage
If you have a lot of debt, consolidation could be your best bet at paying it off. Debt consolidation combines your debt into one stream, rather than leaving you with a pile of different debts to pay off. Technically, the process usually involves taking out a new loan to pay off your existing streams of debt, leaving you with only one loan to pay off.
If you own a home, you may choose to consolidate your debt into your mortgage. This option allows you to refinance your mortgage, which covers your higher-interest loans. Instead of juggling debt, youll be left with one loan to pay: your mortgage.
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Case Study Using A Home Loan
Sheri and Samantha, who are in their mid-30s, bought a $750,000 two-bedroom apartment in Sydney three years ago.
They were able to put forward a 20% deposit after several years of saving and some help from an inheritance.
Their financial situation today:
- They have an outstanding home loan of $550,000
- They have a combined credit card debt of $12,000
- They have a personal loan of $15,000
- Theyre making repayments of $3,319 per month to cover these debts
- They dont have any black marks on their credit report.
But What Is Debt Consolidation
Consolidating your debt involves using the equity in your home to secure a loan, usually by refinancing your mortgage or with a line of credit to pay off other high-interest debts. These debts can include credit cards, auto loans, personal lines of credit, student loans and even payday loans. When you consolidate your debt, youâre essentially combining all of your debt sources into one larger debt at what is usually a much lower interest rate. Doing this can help you budget your finances better and make your debt more affordable and easier to pay off sooner. Not to mention, consolidating your debt and lowering your monthly payments could also help to improve your credit score by increasing your ability to make payments on time and in full.
Hereâs a simple example to help you better understand. Letâs say you owe $20,000 on your credit card with an interest rate of 19.99% . Imagine the same $20,000 to be paid with an interest rate of 2.5% . The annual difference is $3,498. This is the amount of money youâll save over a year if you were to consolidate your debt.
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