What type of loan provides low interest debt consolidation?

There are a number of benefits to debt consolidation, the most important of which include lower interest rates, lower monthly payments and fewer late fees and penalties. To find out what type of loan provides low interest debt consolidation, it's best to first understand what kinds of loans end up costing consumers the most money. Typically, these are unsecured loans with high interest rates and high minimum monthly payments. Usually, consumers get in over their heads when they have multiple loans that are all due at the end of the month. For example, you may have two or three credit cards, an auto loan and student loans. Aside from the auto loan, all of these are unsecured debt, meaning they carry very high interest rates.

A good type of loan for debt consolidation is the opposite of these. It's a single, large loan that is secured and has a single low interest rate and a single low monthly payment. For many borrowers, the perfect vehicle for debt consolidation is a home mortgage loan, a cash out home refinance, a home equity loan or a home equity line of credit. Here's how each works:

Home Mortgage

When you close on a first home mortgage, you can sometimes roll some of your other debt into the mortgage. This is negotiated directly with your mortgage lender and is done before closing. Or, you can simply use the money that you would have used for a down payment and use it to pay off your high interest debt. Ask your home mortgage lender if you can reduce the amount of your down payment and still qualify for the terms you discussed.

Home Equity Loan or Home Equity Line of Credit

A home equity loan is a second mortgage that can be given by the holder of your first mortgage or another lender. For example, if you have a $250,000 home, and you only owe $200,000 on your home, you can take out an additional loan of about $50,000. This is delivered as a lump sum or a line of equity. You can use this money for anything you wish - debt consolidation, home improvements, medical bills - it doesn't matter. But because the loan is backed by the equity in your home, the interest rate is usually very low.

Cash Out Refinance

If you have significant equity in your home, you can also choose to do a cash out refinance. Unlike a home equity loan, this does not put another lien on your home. Rather, it pays off your current loan and gives you a new one. For example, if your home is worth $250,000 and you have $150,000 remaining on your home, you can take out a mortgage for $200,000, pay off your previous loan and pocket the rest. And because you may be able to get a lower interest rate or extend your mortgage term another 30 years, you can do this without significantly raising your monthly payment.

Conclusion

The key to debt consolidation is to move from high interest loans to lower interest loans. If you have low interest credit at your disposal, take advantage of it. Do what it takes to avoid those late penalties, since it'll cost you in cash and damage your credit rating. By rolling your debt into a home mortgage, you can often save thousands of dollars.