Students Of Success

Having trouble paying your bills? Getting calls from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or car?

You are not alone. Many people face a financial crisis some time in their lives. But often, it can be overcome. Your financial situation doesn’t have to go from bad to worse. An option is to consolidate or refinance the debt into a mortgage.

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of paying only one loan.

There are several reasons why you should consider refinancing your existing debt:

· Reduce the interest rate and/or convert from a floating rate to a fixed rate loan
· Reduce the monthly payment by extending the loan maturity

· Convert short term debt to long term debt
· Use the equity you built up in your fixed assets to provide cash
· Consolidate debt
· Get out of debt sooner

You may be able to lower your payments and reduce your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit.

To explain how you can use a second mortgage or home equity line of credit to diminish and control debt, we need to explain the two types of mortgage rates and how they can affect your ability to take out an additional loan or refinance.

There are many types of mortgage loans. The two basic types of loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).

In a fixed rate mortgage, the interest rate, and hence the monthly payment, remains fixed for the life (or term) of the loan. This term is usually for 10, 15, 20, or 30 years. The only increase you might see in the monthly payments would result from an increase in property taxes or insurance rates (paid using an escrow account, if you’ve opted to use an escrow). But payments for principal and interest will be consistent throughout the life of the loan using an FRM.

In an adjustable rate mortgage, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM’s note anywhere from 0.5% to 2% lower than the average 30-year fixed rate. Because these types of loans can have very low interest rates, they have been a popular option for people throughout the past few years when the interest rates have been at such low levels. In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

Now that we have an understanding of the types of mortgage loans, we can discuss how to refinance your original mortgage to consolidate debt.

The amount one can borrow in refinancing from a second mortgage is determined by how much equity is in your home. Equity can be defined as the difference between how much the home is worth and how much you owe on the mortgage. Therefore, a home equity line of credit (known as a HELOC) is a loan that is taken against the equity in your home. The collateral on the loan is your house and, depending upon where you live, local lending laws will regulate how much you can borrow. One of the most popular uses of a home equity credit line is to consolidate high-interest credit card balances, and pay them off before the penalties, interest payments, and annual fees become an unmanageable burden. By using a home equity line of credit, it’s possible to pay off all credit cards, and replace them with a single, easy to manage loan. Another benefit of the home equity line of credit is that it can be paid off gradually, over a long period of time. A home equity line of credit can free you from debt, and help you improve your credit rating at the same time.

According to a recent study by the Consumer Bankers Association, about 36% of the home equity loans and home equity lines of credit taken out are used to refinance debt, making it easily the number one reason for taking out these types of loans.

So far we’ve mentioned two types of home-equity options: home-equity lines of credit and home-equity loans. There’s also a third option, known as cash-out refinancing. Each of these can be used for debt consolidation, and each has its pros and cons. Here’s a quick review.

These days, the hot loan is the home-equity line of credit, which works pretty much like a credit card. You’re given a maximum loan amount of, say, $20,000, which you can then run up or pay off as you choose. Lines of credit are directly tied to the prime rate. Typically you’ll pay the prime rate plus a small markup. (Introductory rates may be lower than that.) Usually there are minimal or no up-front costs to take out a HELOC, and the flexibility of these loans makes them desirable. It also makes them potentially risky for those who can’t have a line of credit open without maxing it.

A home-equity loan (known as an HEL), by contrast, works a lot like a mini fixed-rate mortgage. You get a lump sum, which you are then expected to pay back via regular monthly payments over a set amount of time. Rather than moving with the prime rate, these loans tend to track short- and midterm deposit costs. The current average home-equity-loan rate is 7.91% on a $30,000 loan, according to Bankrate.com.

A HEL can be handy for debt consolidation, since you know exactly how much you owe on your credit cards, and if you take out exactly that amount, you don’t run the risk of piling on more debt. Clearly, though, you’re not going to be doing yourself any favors if you spread out your debt over the next decade.

Finally, there’s the cash-out mortgage refinance. As the name implies, with this type of loan you refinance your mortgage, taking out an extra bit for yourself. (Right now the average rate for a 30-year fixed-rate mortgage is 5.8%, according to Bankrate.com.) This can be a great move, but since refinancing comes with its own costs, it’s worth considering only if you were already planning on refinancing anyway. Also, if you do decide to go this route, make sure you can pay ahead of schedule without getting hit with a penalty.

So how do you find the best rates? Thorough research, of course. Be sure to check both the big lenders and the little ones. You’ll often find that the best rates are offered by local banks, savings and loans and credit unions. Of course, as with any type of loan, the best rates are going to be doled out to the best customers with the highest credit score.

Many Americans have seen their houses skyrocket in value over the past few years, while their credit card debts mounted. New laws and policy changes have made equity lines of credit and second mortgages more appealing to the homeowner and have made it easier to consolidate the debt and live a financially more secure life. Why fall further into debt when a debt consolidation mortgage loan can provide much needed relief.

Laura is an experienced free-lance writer who focuses on home equity and debt consolidation loans. You can read more mortgage refinance articles at http://www.nationwidemortgages.net/ and get more information about home equity loans and mortgage refinancing.

© 2006 Copyright Nationwide Mortgages

On April 20 of this year, President Bush signed a bankruptcy reform law. When this law went into effect in October it made it much more difficult for Americans to use Chapter 7 bankruptcy to get a fresh start on their financial lives.

Under the old law, you could choose to file either a Chapter 7 or Chapter 13 Bankruptcy. In a Chapter 7 proceeding, you are allowed to keep your exempt property, such as much of the equity in your home. Most of your other debts, such as money owed on credit cards, are discharged.

In comparison, a Chapter 13 Bankruptcy is a reorganization bankruptcy. In this type of proceeding you agree to pay off your debts over a period of three to five years.

The result of the new law is that fewer people will be able to file for Chapter 7 Bankruptcies and will be forced to file for Chapter 13 Bankruptcies, instead.

Major Changes

Possibly the biggest change to bankruptcy law is that there will now be a qualifying test. Under this two-part test, you will first be required to apply a formula that exempts certain expenses such as food, rent, etc., to see if you can afford to pay 25 percent of your “non-priority unsecured debt” (credit cards, medical bills and the like). Second, your income will be compared to your state’s median income.

If your income is above your state’s median income, and if you can afford to pay 25 percent of your unsecured debt, you will not be allowed to file for a Chapter 7 Bankruptcy.

You may be able to file for a Chapter 7 Bankruptcy if your income falls below your state’s median income but you can pay 25 percent of your unsecured debt. However, if the court believes you would be abusing the system by filing a Chapter 7, you can be required to file for a Chapter 13 Bankruptcy, instead.

More differences

If you filed a Chapter 7 Bankruptcy under the old law, the court would determine what you can afford to pay based on what you and the court determines are reasonable and necessary living expenses.

Under the new law, the court is required to apply living standards that are derived by the Internal Revenue Service to determine what is reasonable to pay for rent, food, etc., and how much you should then have left over to pay your debts. The IRS regulations are more stringent and if you want to contest them, you will need to ask for a hearing in front of the bankruptcy judge. This can easily mean more time and expense.

Tougher exemptions

When you declared bankruptcy under the old law, your state might have allowed you to keep all or much of the equity you have in your home. However, the new law places tougher restrictions on this exemption. So before you file, be sure to discuss this with a knowledgeable bankruptcy attorney so that you will know exactly how much of your home’s equity you can expect to protect.

Credit counseling

Here’s another tough restriction. Under the new bankruptcy law, you must meet with a credit counselor in the six months before you apply for bankruptcy. However, from what I have read, many of the “certified” counselors are totally backed up and cannot handle any new cases.

You must also attend money management courses – at your expense – before your debts are discharged.

Before you do anything, make sure you talk to a good bankruptcy attorney.

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Bankruptcy can be devastating both economically and emotionally. Extensive damage to your credit and long-term economic issues from bankruptcy will cause many problems in the years to come and it is far better to explore other alternatives before making the decision to file for personal bankruptcy.

Some of the alternatives to bankruptcy include: Renegotiate secured loans, Debt consolidation, Debt deferment, Renegotiation of unsecured loans, Interest debt reduction, Professional debt negotiation, and working with Debt Reduction Attorneys.

Renegotiate secured loans

Bankruptcy does not get rid of all your debt. Secured loans are generally for items such as cars and/or your house. These loans are usually the largest debts that people have, yet filing bankruptcy will not reduce those debts. However, if your debt hasn’t ruined your credit already, you may be able to renegotiate the loans or take the loan elsewhere.

For instance, if you have a home loan that is several years old, you may be able to significantly reduce your interest rate. Depending on your principal balance, you may see your payment go down several hundred dollars per month.

If you only have a few years left on a house mortgage, you may also be able to extend that loan over a longer period and reduce your payments even more.

Debt Consolidation

Most people have multiple payments that they must make every month. High interest credit card bills, car loans, house mortgage, and doctor/hospital bills can add up to some very serious payments every month. If you have equity in some real estate, especially your home, you can often get rid of these debts by taking on a first or second mortgage and use that money to pay off your other debts. But be sure to run the numbers first. There isn’t any point in consolidating debts if it isn’t going to make a significant difference in your ability to pay. Consolidating unsecured debt under a home mortgage will make the entire debt secured and bankruptcy wouldn’t do you a bit of good.

Debt deferment

Debt deferment means to make arrangements to pay certain bills at a later time. Rather than lose a good customer and the debt owed, some merchants may be willing to let your debt sit and collect interest while you pay your other bills. Few secured loan holders will go along with this because they generally have nothing to gain. However, other merchants may be willing to do so.

Renegotiation of unsecured loans

Unsecured loans generally are far more at risk, but there may be some wiggle room. Some merchants are willing to reduce or even eliminate any interest or carrying charges in order to let you pay off your entire debt amount.

Interest debt reduction

When people get into a credit mess, it’s often due to extensive interest that has accrued on the original balances. Creditors may not be willing to negotiate the principal balance but are generally more amenable to working with you on the accrued interest because it isn’t reflected in the books the same way.

Professional debt negotiation

Debt negotiation companies can take out the hassle and do much of the work for you by developing and then taking your case to the creditors. Since your negotiation company has no personal involvement, discussions remain purely about resolving the business relationship, leaving both parties more amenable to working out a solution.

Debt Reduction Attorneys

In cases where your debt load or asset level is high , you should probably seek out professional legal help from an attorney that specializes in debt reduction. Debt reduction attorneys have a wide variety of skills and can often do a better job of working with some creditors.

A debt reduction attorney will also take a look at any contracts you may have and become very familiar with the case. This can come in handy if other actions must be taken and therefore reduce some redundancies.

Chris Simons is a freelance writer. You are welcomed to visit http://bankruptcy.cyberinformer.com, for more information on Bankruptcy