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Debt Consolidation Loan

So what does it mean to consolidate your debt and how does it help me? Debt consolidation is when you pay off one or more loans with a new loan. These types of loans are often taken out in order to lower the interest being paid on the current debt, refinance the debt from an adjustable to fixed interest rate or to provide some convenience by consolidating multiple debts into one loan.

While debt consolidation loans can result in one or more unsecured loans being refinanced into another unsecured loan, it is more common that the debt is consolidation into a mortgage allowing the home to serve as the collateral. The fact that the home is used to collateralize the mortgage allows for the consolidation loan to carry a lower interest rate than it would you were to consolidate the debt into another unsecured instrument. This lower interest rate is offered by the lender because the home provides a reduced risk of a total lose on the financing.

One type of debt that is often looked at as a good candidate for debt consolidation is credit card debt. Credit cards usually carry much higher interest rates than many other forms of financing. While an unsecured loan from a bank can often provide a lower rate than you are paying on the credit card balance, using a debt consolidation loan to refinance you home to pay off the cards can often time provide you with an even lower rate. Being able to roll your debt into your mortgage can save you on future interest payments due to the lower rate as well and put you in a position to pay off your outstanding balances much faster.

Other types of unsecured debt include: Medical Bills, Department Store Cards, Personal Loans, Utility Bills, Tax Debt and Student Loans.

Type of Loans that can be used to Consolidate Debt:

  • Cash-Out Refinance Mortgage: With these types of mortgages you essentially withdraw cash as you refinance your current home loan and then use the proceeds to pay down your unsecured debt.
  • Home Equity Loan: Also called a second mortgage, instead of refinancing your current mortgage you will use some of your equity to secure a second mortgage on your property. The lump sum cash you receive form the 2nd mortgage will then be used to pay off your debts.

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