Cash Out Refinancing for Debt Consolidation

If you have lots of credit card debt, it might make sense to consolidate it to get a better interest rate and a single payment. If you own a home, you may be able to consolidate this debt by doing a cash out refinance.

What's a Cash Out Refinance
When you do a cash out refinance for debt consolidation, you are replacing your existing mortgage with a new one that is larger. You take the excess portion of the new mortgage out in cash, which you then use to pay off your debt.

To do a cash out refinance, you must have a significant amount of home equity, because most lenders only let you cash out equity in excess of 20 percent.

For example, if you have a home that's worth $150,000 and you owe $100,000 on your mortgage, you could get a new mortgage for $120,000 and use $20,000 to pay off debt.

Advantages
One big advantage to doing cash out refinance for debt consolidation is that you can get much lower interest rate. Most credit cards have interest rates of anywhere from 15 to 25 percent, while mortgage rates are around 4 percent.

Another advantage to consolidating debt with home equity is that you get one payment for all your debt. This makes it much easier to keep track of your debt and makes it less likely that you'll miss a payment or pay late.

Disadvantages
Cash out refinancing has a number of disadvantages. For one, the loans carry high fees. Just as with a mortgage you get when you buy a house, a refinance requires you to have the home appraised, and there are loan origination fees, documentation fees, fees for a credit check and other fees. These fees can reach into the thousands of dollars and cut into the money you are saving by consolidating debt.

Another disadvantage to doing a cash out refinance is that it prolongs the payoff period for your debt. Most mortgages are for 15 or 30 years, while you could easily pay off credit card debt in a few to several years.

A further disadvantage to doing a cash out refinance to consolidate debt is that by tying credit card or other debt to your home and increasing your mortgage amount, you are increasing the chance that you could default on your loan and lose your home.

Better Than Bankruptcy — Choose Debt Consolidation

Seemingly insurmountable problems related to debt cause some to resort to bankruptcy. While it has its advantages, it undoubtedly poses more setbacks in terms of your credit score and financial standing. It is good to know that other than filing for bankruptcy and accepting all the negative implications that would affect the consumer in the long run, there are other solutions to problems regarding debt. Situations may vary as to what manner of handling should be utilized and would be best for the consumer, but as long as options are viable, bankruptcy should be avoided and put aside as a last resort.

Debt consolidation, for one, has certain advantages that might be practical and helpful for a debtor. One of its pluses is that it lessens the stress in that all debts are consolidated into one, thus allowing the debtor to save himself/herself from the clutter of going through all the bills and making separate payments for each. Other than the comfort and easy management of one’s debts, it also promises lower interest rates and lower payments, which may help the debtor save money. Although the complete erasure of debt may take years to accomplish and it leaves an impact on the debtor’s credit records, the potential freedom from financial worry makes debt consolidation a better and healthier option for the consumer.

Despite its disadvantages, debt consolidation, alongside other probable solutions for resolving debt crisis, should be given ample study and consideration before resorting to bankruptcy. Know how each debt relief option would work given your situation. Start the change by making an informed decision. After all, money owed should be returned. And somehow taking responsibility by finding ways to pay off debt, however late in the process, is a sign that a consumer wants to fulfill his or her obligation and retain personal integrity.

Debt Consolidation Loans vs Debt Consolidation Programs

The statement, "banks only lend money to those who can prove they don't need it," is unfortunately true in many cases. While one of the best methods to control and refinance credit card debt would be a bank loan, a person overwhelmed with credit card debt will have a very difficult time obtaining a debt consolidation loan from a bank. Another option, credit card counseling, can be helpful, but the debtor needs to thoroughly investigate and evaluate any company that offers this service

Non-Profit Credit Counselors

A true non-profit agency is a good place to start when a legitimate credit counseling firm is needed. First, these companies will analyze the situation, attempt to find a fix and counsel the debtor in ways to avoid a recurrence of the problem. These companies, while they may charge a nominal fee to cover expenses, will not require a large down-payment and will absolutely not require a client to make monthly payments directly to their agency. A good non-profit credit counseling concern also may be able to contact lenders and help structure deals for lowered interest rates, lowered payments and reduced late fees. It must be stressed that no credit counseling agency will be able to erase prior negative ratings that were reported to credit bureaus.

For-Profit Debt Counselors

There are two types of these firms. Some are licensed attorneys, who, for a fee, will contact lenders in order to lower payments, penalties and fees. Sometimes lawyers can negotiate an agreement that settles an account for only a percentage of what was originally owed. Lawyers will usually not act as credit counselors as their main focus will be debt reduction.

The most dangerous type of credit counseling company tells consumers to stop paying all credit cards. Then they instruct the client to make those payments directly to their company. When the balance grows to certain amount after a number of months, these companies call creditors and try to settle the debt for less than what is owed. They also take a large percentage of the payments as a service fee. Unfortunately, late fees and negative reports to credit bureaus continue, as these companies rarely contact the debtor's lenders until they have collected a substantial balance from the client.

Consumers should first try and deal with their debt themselves as many creditors have programs that can be beneficial. If that fails, due diligence is in order. 

Debt Settlement vs. Bankruptcy

If you are over your head in finances and not sure what to do, consider debt consolidation before you consider bankruptcy. By declaring bankruptcy, you are setting yourself up for 7-10 years of credit report nightmares that will stick to you in a very bad way. Although credit consolidation will also leave some negative marks on your credit report, these negative factors are weighted less against your credit score than bankruptcy. 

Declaring bankruptcy means that you aren't able to pay back on your debt obligations, leaving creditors without a chance to recoup much of what they lent to you. Your credit scores for bankruptcy will be lowered to the sub 500's or even the 400's. Consolidation will also leave some negative marks on your credit rating, but you could still have a significantly higher credit score because you are still paying most of your debt back.

The consolidation process gathers all of your debts and combines them into one bill. Consolidation companies will work with your debtors to pay them out according to a schedule. They will even work to negotiate the removal of some of your late fees and reduce your interest rates. Your creditors will get paid, although it may not be on the ideal payment schedule.

Your credit report may reflect marks such as "paid for less than the full amount" or "over the limit/late, but account current." Although these marks hurt your score, it is minimal compared to defaulting on your credit card and not paying anything at all. What's even worse is when you have a bankruptcy written across your credit report. Defaults and bankruptcies will sit on your credit report 7-10 years depending on what state you live in.

The debt consolidation process will cost you some money. Many companies will require a small fee upfront to begin contacting your creditors and gather up the total debts. You will then put money into a monthly account which the consolidation company will then use to pay your creditors. Some of your creditors may be paid in monthly payments, others will negotiate a deal for less than the balance if given a lump sum of money. The consolidation company will usually charge a percentage of your negotiated savings as their fee and deduct this from your account. The process could take a long time to complete, but you will be debt free in the end.

Before you consider bankruptcy, do some research and see what consolidating your debts can do for you.

Bankruptcy Credit Counseling

Many people find themselves overwhelmed by debt sometimes due to poor decision-making or poor planning. Easy credit and the need for immediate gratification can land hardworking people in more debt than their incomes will cover. In other situations critical illness, accidents, death, and job losses, may reduce household income to a point where there is only enough money to cover bare necessities like mortgage payment, utilities and food. Credit card debt and consumer loans may go unpaid. As a result, individuals and families end up with poor credit and no hope of digging out from under a mountain of debt. For many, bankruptcy is the only option. However bankruptcy is getting more difficult to declare, due to the numbers of people who have taken this route in the past.

Prior to pursuing bankruptcy, it is wise to look at other options that might relieve some financial pressure. Debt consolidation or credit card consolidation may be the answer in some situations. If the credit standing is still decent, a bank may be willing to provide a debt consolidation loan. This type of loan would allow a debtor to use credit card consolidation, or pay off all credit cards with the loan. As a result, there is only one payment to make, and in most cases the interest rate would be better than the rates on several cards. As long as no more debt is incurred, it is possible to pay off the debt load in a much shorter period than it would take to pay off several creditors. However those that choose to consolidate debt should be aware that for people who lack self control, it is easy to get back into the debt trap.

Those who feel that they have no recourse except to file for bankruptcy are required to seek credit counseling to determine if that is the best option. Current law requires that persons seeking bankruptcy receive credit counseling six months prior to filing, to determine if they are suitable candidates for this option. During this counseling session of at least 90 minutes, a qualified credit counselor helps a debtor analyze his or her situation to determine if there are alternatives to bankruptcy. Sometimes a fee may be charged for this service, but it can be waived. In some instances, a credit counselor can help a debtor set up a debt management plan that will satisfy creditors, and enable debt to be paid down without undue stress. The payments are made to the credit counseling agency, and distributed to the creditors based on a plan that is agreed upon by all parties. If such a plan is impossible, the next step may be to file bankruptcy.