Debt can be overwhelming. On top of a large mortgage, you may also owe multiple credit cards, auto payments, and personal loans. All of these debts carry their own interest rate, and if they are not paid, can quickly drag down your credit score and drain your bank accounts. You need to know how to consolidate debt, especially if you want to keep your home and prevent your credit score from plummeting.
Good news: there are plenty of ways to consolidate debt. Let's take a closer look.
Debt consolidation, put simply, means taking out one new loan instrument or line of credit and then using that money to pay down all or many of your existing debts.
Here’s an example:
By practicing debt consolidation, you can make your financial situation much more manageable and, in the process, reduce how much money you have to pay every month.
In many cases, the new repayment loan or line of credit you use will be far better than the previous loans you had under your name.
Such a debt consolidation loan might have:
In the long run, this can have a significantly positive impact on your credit history, allowing you to build up good credit on your credit report in no time.
There are several big reasons to consolidate your debt. The benefits of debt consolidation include:
Above all else, consolidating your debt can provide you with excellent peace of mind. If debt settlement isn’t among your debt consolidation options, there are other debt relief strategies you can pursue with a bank or credit union.
If debt consolidation sounds like a good strategy, great news: there are several ways in which you can consolidate debt.
A balance transfer credit card is a special type of credit card with a 0% introductory annual percentage rate or APR. That 0% APR applies to any balance transfers for a set timeframe, usually anywhere between nine months and 21 months.
With a balance transfer credit card, you can transfer all of your debts to the new credit card, then pay off that debt throughout the introductory period. If you do this smartly and quickly, you can avoid paying interest! Therefore, this can be a fantastic tool if you have plenty of high-interest debt that you are struggling to pay.
Just keep in mind that balance transfer credit cards do have credit limits, and you may have to pay balance transfer fees depending on how much money you put onto the new credit card. You’ll also need to make the minimum payments necessary as you pay down this credit card account.
Alternatively, you can look into a debt consolidation loan. As their name suggests, debt consolidation loans are special loans intended to be used to pay off multiple existing debts. Then, you’ll just have one loan remaining with one monthly bill.
On the downside, debt consolidation loans are usually only appropriate if you have a decent credit score, as you’ll otherwise be saddled with a potentially high interest rate. Furthermore, you should watch out for origination fees attached to debt consolidation loans. Some lenders charge very high origination fees, potentially up to 10% of the loan’s total amount!
Many nonprofit credit counseling agencies offer debt management plans or DMPs. Put simply, a debt management plan can help you learn how to manage your debt. This is a good strategy if you need additional financial literacy or you need help learning how to pay down small debts one at a time, close unused credit cards, and so on.
In addition to the above methods, you can leverage your home’s equity to pay down debts or consolidate your loans in a variety of ways.
A HELOC or home equity line of credit is exactly what it sounds like — a line of credit you draw on to borrow against the equity you’ve built up in your property. With a HELOC, you can immediately take that money and pay down existing debts, then simply pay down the remaining balance in your HELOC like you would pay down the balance for any credit card or line of credit.
However, keep in mind that most lenders only allow you to borrow up to 85% of the equity in your property for a HELOC or home equity loan (see more below). HELOCs also sometimes charge annual fees, which can add up over time.
Home Equity Loan
A home equity loan is a traditional loan instrument that borrows against your house’s equity. Like a HELOC, you can use a home equity loan to immediately get fast access to cash to pay down your existing debts. Then, you’ll just have one monthly payment toward your home equity loan.
With a home equity loan, you can put your house at risk, and you can only borrow up to the value of 85% of your home's total equity. Keep in mind as well that home equity loans charge closing costs of between 2% and 5% of the loan amount.
Co-Ownership With Balance
If none of the above options are suitable for you, consider co-owning with Balance Homes. If you’re approved for our homeownership program, we’ll replace your mortgage loan with an equity investment — meaning your mortgage will be paid off. Instead, you'll make one monthly payment to Balance that covers your occupancy of the home and your share of the insurance and taxes.
Balance works with their homeowners to try and find the right solutions. If a homeowner is afraid of falling behind, Balance may allow them to sell additional portions of equity to avoid setbacks while their credit recovers. Balance’s program allows you to keep your home and access your equity to consolidate debt, make home repairs, and build up your credit and savings.
In the end, any of the above debt consolidation methods and techniques could be helpful tools to help you reclaim control over your bank account and your credit score. However, co-owning your home with Balance may be the best long-term solution if you are facing financial difficulties.
With Balance, you'll have the opportunity to pull yourself out of your debt load, repair your home, pad your savings, and much more. Contact us today to see how we can help you not just consolidate your debt, but pay it off for years to come.