How Debt Consolidation can lower your bills

Images Money/flickr/Creative Commons
 

Having debts from many sources isn't going to help your financial situation. Instead, you must consolidate your debts which lowers your actual expenses due to lower interest rates. You could go about this using either refinancing or home equity loans, and the choice between them if up to you. You should choose the one which offers benefits that are better suited for your current mortgage terms and what you want to achieve financially.

Get a lower interest rate
Basically, what you want is a lower interest rate on your loans, and that's what you can achieve by consolidating your loans. However, you must make sure that there is a sufficient benefit from this move, because initially the loan fees may take away a large chunk of what you save, and that can result in you sometimes paying the same amount as what you paid before.

Another thing to look at for reducing costs is the loan term.  By having a longer loan term, naturally, you are lowering your interest rates. But if you can pay everything off quicker, choose the short-term loan plans, even though you would be paying higher interest rates.

Timing is the most important for this step to be effective, which is why you should pay off your monthly installments as quickly as possible, else you would have to pay interest.

First method for Debt Consolidation: Refinancing Your Mortgage
The first thing you should do is to refinanced your mortgage, which can result in lower interest rates, as lenders prefer one mortgage to two or more such loans.

Of course, if your current loans have low rates, while refinancing plans ask for more, then you should not opt for refinancing your mortgage.

For instance, lets say you need to pay off $200,000 at 5% interest over 30 years. This would cost you $186,513.24 in interest. If you refinance your mortgage with $10,000 adding to your debt, and you need to pay it off at 6% interest, then it would cost you $45,000 more. These are situations where home equity loans make more sense.

Strategic use of a Home Equity Loan
The main feature of a home equity loan is that you can use your equity while not touching your original mortgage, and this eliminates the need to pay for private mortgage insurance.

Home equity loans would have higher rates than what you get with refinancing, and this usually matters only if you already have a high-rate mortgage, in which case you should choose a cash-out refi.

 In the end, you need to weigh the pros and cons and look at which option saves you the most money, which is now just a click away on most lender websites.