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Find Your LenderHome Equity » Benefits of debt consolidation
Most Americans have some amount of debt whether it's on credit cards, car loans, or retail consumer accounts. If you've found yourself in a position where the amount of minimum payments owed to your creditors is becoming overwhelming, pursuing a debt consolidation mortgage loan or 2nd mortgage might be a logical idea. With credit cards in particular, the interest savings by consolidating that type of debt can be enormous. Credit cards function on what’s called compound interest and that's why it can take forever to pay off your balances if they've gotten too high. So what is compound interest?
Compound interest is the addition of interest owed to a creditor applied to your existing principal balance. For example, if your APR on your credit card is 19%, over the month you will accrue interest that is owed to the creditor...additionally, that interest is added to your principal balance. If you don't pay your balance off, or only make the minimum payment, when interest owed is calculated the following month, you'll also be paying interest on the interest owed from the month before! It can turn into a vicious cycle of ever-growing credit card balances.
If you've got credit card debt or other higher interest rate debt payments, a debt consolidation loan could save you a considerable amount of money over time. Before you consider consolidating with a home loan, you should add up your monthly debt payments and compare the total payments to the payment of the new loan. An example might look like this:
| Debt Type | Balance | Payment |
| Credit Card 1 | $5600.00 | $140.00/mo |
| Auto Loan | $14800.00 | $340.00/mo |
| Student Loan | $7800.00 | $108.00/mo |
| Credit Card 2 | $2100.00 | $66.00/mo |
| Totals | $30,300.00 | $654/mo |
The example above shows that you are paying $654/month for all of your minimum payments. It's possible to cut your minimum payments down drastically if you consolidate them into one home loan. We'll use a second mortgage debt consolidation as an example:
2nd Mortgage balance = $30,300.00
2nd Mortgage interest rate = 8.00%
2nd Mortgage term = 15 years
2nd Mortgage payment = $289.56/mo.
In plain English, you would be saving $364.44/month ($654/mo - $289.56/mo) if you were to consolidate your bills and take out a home equity loan. Everybody's situation is different so you should speak with a BeatMyBroker.com mortgage professional about debt consolidation if you think it could be right for you.
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