Another alternative to reduce your credit card debts is to consolidate your debts. Consolidation means to take one loan to pay off many others. The common reasons for debt consolidation is to secure a lower interest rate or a fixed interest rate or for the convenience of servicing only one loan.One way this can be done is through home loan refinancing or take up an equity loan.
If you own a house, you may be able to significantly reduce your debt payments by refinancing your existing mortgage, or taking out a second mortgage on your home. A debt consolidation mortgage loan allows you to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan. Just like the first mortgage, a second mortgage is also secured against the house. The collateralization of the loan allows a lower interest rate than without it because the risk of the lender is reduced as opposed to credit cards debt.
For someone with a lot of credit card debt and other obligation, rolling all those bills into one monthly payment can seem like an attractive option, particularly when you can get a lower interest rate in the bargain.
Calculations of Savings
An example of how home refinancing or a second mortgage can helps you save thousands of ringgit:
Mr Lim owns a condominium worth RM340,000 with a mortgage outstanding balance of RM200,000. He also has RM25,000 in credit card debts. The credit cards have an annual interest rate of 18%, so Mr Lim pays about RM375 per month in interest on these credit cards every month. If Mr Lim takes a second mortgage on his condominium of RM25,000, at an interest rate of 5%, amortized over 15 years, his payments would fall to under RM200 per month. The RM200 payment per month includes both principal and interest, so not only Mr Lim is saving in interest costs, he will actually pay the debt off with a smaller payment than they are making now for just interest payments.
List of Benefits of Debt Consolidation Mortgage Loan
Besides savings you a lot of money through lower interest, the other benefits of paying off your credit card debts with home equity financing are:
- One step closer to debt-free living as you no longer incur high credit card interest rates.
- Consolidate overdue bills and debts into one affordable payment.
- No more nagging calls and letters from creditors.
- You save and rebuild your credit rating.
Debt Consolidation Pitfalls
Caution: Debt consolidation must be accompanied by change in your spending habits! You could end up with more debts if you are not discipline. Below are 3 essential tips you need to follow after consolidating your debts:
- avoid using your credit cards and stop creating new outstanding for your cards.
- plan your monthly budget and do not overspend.
- set up an emergency fund (about 5% of your monthly income for unexpected events such as illnesses, natural disaster, unforseen financial news).