1Onefund Financial – How does debt consolidation really work?
Chances are that you have heard the term “debt consolidation” but you might not be sure exactly what it is or how it really works.
Put simply, debt consolidation is when you take all of your non-mortgage debts (credit cards, personal lines of credit, payday loans, car loans, etc.) and combine them into one single debt that you make monthly or bi-weekly payments on.
There are two primary advantages to doing this. This first is that now instead of having multiple debts to pay down each month, you only have one. Not only is this much more convenient, but it lessens the risk that you might inadvertently forget one which could have a negative impact on your credit score.
The second main advantage is that through debt consolidation, you can significantly lower the total interest that you are paying on your debt. That means you can lower your monthly payment and improve your cash flow each month, or you can pay down your debt much faster – sometimes even years faster! In some cases, you might even be able to do both of these things!
What financial products can be used for debt consolidation?
Although nearly any type of loan can be used for debt consolidation, the lowest interest options are usually mortgage products. If you have a home, you can borrow up to 80% of your home equity and use it as a debt consolidation loan. When borrowing against your home equity, there are three main options:
Mortgage refinancing – this is when you break your first mortgage and get a new one. To use mortgage refinancing for debt consolidation, you would refinance for the amount left owing on your home plus the amount of debt that you wish to consolidate. You would receive that amount in cash to pay off your existing debts.
Second mortgage – this option does not require you to break your first mortgage. Instead, it is a separate loan against the equity in your home that you would use to pay off your other debts.
Home equity line of credit – finally, this is a revolving line of credit against the equity in your home. This is less popular for the purposes of debt consolidation, but it may be worth considering if you think you will have to borrow more money in the future.
Contact us today
If you would like to learn more about how we can help you with debt consolidation, contact us today!