Deciding To Consolidate Debt?
What is the point of consolidating
debt and when should you do it? What are some of the options for
consolidating debt? At some point in their financial lives, many people
ask these questions. If you have been pondering these thoughts, read on.
Consolidating debt means different things
to different people. To a young couple or family thinking about buying
a home consolidating debt may be necessary to lessen their debt to income
ratio. For a single person tired of writing ten or twenty checks each month
consolidating debt may be a way of making his/her financial life more convenient
and organized. A family with college age children may consolidate debt
in order to fund a college education. Older people on the verge of retirement
may be considering debt consolidation as a way of simplifying their lives
and adjusting to a change in income. All of these scenarios are sound reasons
for investigating debt consolidation and all require different approaches
for said consolidation.
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What types of debt consolidation
might be used by the people in each of the previous situations?
A couple on the verge of their first home
purchase may find that the amount they owe on their credit cards each month
takes up too large a portion of their monthly income. Sometimes lending
institutions will not approve a home loan for a buyer who does not have
a certain amount of unobligated income. In order to free up a little income
the couple may choose to consolidate their debt. To accomplish this all
of the current bills would be paid off via a lower interest, longer term
loan. Because the loan is not costing them as much in interest and is being
paid off over a longer period of time the monthly payment would be smaller.
Thus, the proportion of debt to income would be lower.
When a person is just tired of writing
a great number of checks each month and concerned that one month a payment
due might get overlooked, he/she may choose to do a simple debt consolidation
for the purpose of bringing all of his/her bills under one roof. If the
person has good credit this is easily achieved. Sometimes if the debt is
refinanced at a lower interest rate not only will the person end up with
a more convenient payment he/she will also have a lower payment.
A family which owns its own home may tap
the equity in that home to pay for a child's college education. In order
to do this the home must have accumulated sufficient value to cover the
cost of the mortgage, the cost of the refinancing, the cost of the bills
to be rolled over and still generate enough cash to pay for the child s
schooling. Given the rate at which home values have appreciated in recent
years having this much equity is not unreasonable. However, homeowners
should not make their homes piggybanks for any type of expense that comes
up. Constant cashing out of a home s equity is expensive and perhaps even
dangerous over the long run.
Persons nearing retirement age may choose
to consolidate debts in order to make life less complicated as well as
to make living less expensive. This type of debt consolidation is also
done by accessing the equity in one s home. If the mortgage is long standing
and the couple has maintained good to excellent credit it may be that the
house can be refinanced at a significantly better interest rate while also
generating cash to pay off a substantial number of bills. Thus, as the
couple enters their retirement years they have a lower house payment and
fewer bills to pay.
The above examples illustrate just a few ways
that debt consolidation may enhance the lifestyles of modern consumers.
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