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Consolidation Loan
Learn from more than 166000 people how they got out of debt?
The purpose of a consolidation loan is to move debt that has a high interest rate to a debt instrument that has a lower interest rate. Examples of new debt instruments with lower rates may be another credit card or a consolidation mortgage or home equity loan.
A credit card consolidation loan is the most popular reason for considering a consolidation loan.
It's really the interest payments that are the "killer." High interest rates on credit cards make a credit card consolidation loan a great way to reduce expenses. The lower the interest rate, the lower your interest charges will be. With lower interest rates, you can apply more of your payment to actually reducing your debt.
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You can get a credit card consolidation loan that is unsecured or secured. An unsecured loan is backed by your good name and good credit rating, giving assurance to the lender that you will repay the loan. A secured loan is normally backed up by your home.
You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can't make the payments - or if your payments are late - you could lose your home.
What's more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay "points," with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.
To qualify for a home equity loan you must have some equity in your home. If you have lived in your home for several years, your home has probably increased in value. This value can be used to qualify for a home equity loan.
How Interest Rate Changes Affect Mortgage Rates
Mortgage rates depend on the interest rate the government charges to lend money to banks--the federal lending rate. Variable mortgage rates are often a fixed percentage above this "prime rate."
If the 30 year treasury index is higher than the 5 year treasury index, the overall trend in interest rates are upward.
If the 30 year treasury index is lower than the 5 year treasury index, the overall trend in interest rates is downward.
What if interest rates are headed upward?
If interest rates are rising, mortgage rates will also rise.
So, if interest rate are increasing, there is increasing pressure to get a consolidation loan soon.
What if interest rates are headed downward?
On a $100,000 mortgage loan, every time the mortgage rate drops by a quarter point, you will save about $20.83 per month in interest charges.
Let's say you have $30,000 in credit card debt at 18%. This is costing you about $450 per month in interest charges.
Consolidating this $30,000 debt into a 5% mortgage would cost you $125 per month in interest. You would save ($450 - $125=) $325 per month in interest charges.
It would cost you $325 per month to wait for a better mortgage rate deal. This simply is not worth it.
After you get a consolidation loan, if mortgage rates continue to decline, you can always refinance you mortgage at a lower rate and get the benefit of lower interest payments.
It would still be smart to consolidate as soon as possible.
For more information about consolidation loans please see Online Consolidation Loans -- Reduce High Interest Debt.
Online Consolidation Assistance
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