Written by Anza Goodbar (last updated November 22, 2011)
In our credit crazy world, it is easy to get in over our heads in debt. Most American families do not have huge savings accumulated to weather a storm of lost income for a prolonged period of time. In cases where consolidating debt into one monthly payment can help balance the monthly budget, this could be a good option.
A debt consolidation loan is predicated on how much equity is in your home. This is established by the value set by the county assessor's office in your area, coupled with a physical appraisal by a certified home appraiser. Value is established by like sized homes that have sold in your area within a 2 mile radius.
Once the home's value has been established, the loan institution will calculate how much equity has been accumulated in your home load. This is the amount that can be used to take cash out of your new loan and pay off debt. Keep in mind; this can be a costly alternative as you will be paying off your debt over 30 years.
It is also possible to get a secured loan from your local bank to consolidate payments and get a lower overall interest rate. However, don't be fooled, the in the long run, it would still be more expensive than just paying down your debt on a monthly plan.
Beware of debt consolidation programs that offer to negotiate with credit card companies to reduce interest rates and lower payments. These programs report to credit bureaus and many lenders look at these programs in the same way as they look at a bankruptcy. This reporting can stay on your credit report for up to 10 years.
The best way to pay off debt is to waterfall your payments. By this, I mean, make a monthly budget, and start by paying off your lowest balance. Once that bill is paid in full, apply that full payment to the next lowest balance and so on. By not accumulating new debt, and paying off existing debt within your current budget, you will be out debt without incurring additional financing costs.
The most important part of debt consolidation is changing the way you think about and use credit. If you continue to add to your debt, you will never be debt free. Make a pact with your spouse to lead a debt free life and live within your means. If you use credit, pay off balances at the end of each month rather than over time.
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