Lois and her granddaughter Emma like to watch Antiques Roadshow on PBS. People bring in possible hidden treasures that they discovered in a basement, in an attic, or while dumpster diving. Some people bring in very valuable items, and everyone is astounded at how much the items are worth. Usually between the oohs and ahs of shock come the words, “Oh I’ll never part with it.” At this point, Emma shouts out,
“Sell it!” Like her practical father, she has picked up on the fact that the money would serve the family much better. These valuables are just objects. Take a picture to remember it by, and then sell it!
Recently, we consulted with a real estate pro- fessional who was facing foreclosure. The market in Michigan was in a slump and so was her business. She was fraught with worry and
hopelessness. She became physically ill, and her blood pressure skyrocketed. After we sat down, educated her on the foreclosure process, and began drawing up a list of income, assets, and expenses, we discovered that she and her husband had a barn full of antiques, including two antique cars. They began cleaning up and clearing out, and they were able to sell one of the cars for $31,000. They went from cowering to empowering.
According to the Self Storage Association, there are over 2.2 billion square feet of storage space in the United States. Much of that space is stuffed with personal belongings that just won’t fit in today’s massive houses. If you’re a packrat, start selling that stuff. It just may bring in enough money to get you past your current financial crisis.
In the following sections, we reveal the potential benefits of debt consolida- tion, show you various ways to consolidate debt, and lead you through the process of determining the actual cost of a loan, so you can comparison-shop for debt consolidation loans. (For additional tips and tricks related to borrow- ing your way out of foreclosure, check out Chapter 12.)
Understanding the benefits of debt consolidation
When people are already in the position of not being able to pay their bills, they’re often reluctant to take out yet another loan, but you have to realize that debt consolidation can be a valuable tool for reducing your overall debt and making life a little more livable:
You can transfer non-deductible interest (like the interest you pay on credit card debt) into tax-deductible interest (like the interest you pay on your mortgage).
Consolidation often transforms high-interest debt into low-interest debt.If you owe $20,000 in credit card debt at 18-percent interest, you’re probably making payments of about $300 per month. Payments on that same amount at 8 percent would be around $136 per month.
If you apply the savings toward paying down the principal of the consolidation loan, you can pay off your debt much more quickly.In the previous example, if you could afford to continue making the $300 monthly payment, you could apply the extra $164 to principal. And if you can’t afford it, you have an extra $164 to cover other bills.
Choosing the debt consolidation option that’s right for you
So, how do you go about consolidating your debt? The following are some options you may want to explore:
Refinance your mortgage.You may be able to refinance and use the equity in your home to pay off your other debts and have a single monthly payment. Be careful with this option, however: Refinancing is costly — you usually have to pay some sort of closing costs upfront, which can add thousands of dollars to your total debt. (See Chapter 12 for more information on the refinancing option.)
Take out a home equity loan.If you have equity in your home, you can take out a separate loan to borrow against the equity and use the money to pay off your credit card debt and other loans. You then end up with two payments — your mortgage payment and your payment on your home equity loan.
Take out a home equity line of credit.With a home equity line of credit, you borrow what you need when you need it, against the equity in your home. You then have two payments — your mortgage payment and the payment on your home equity line of credit. The best part of the home equity line of credit is that you borrow only what you need and are charged interest on only the amount you borrow. If you pay off the loan, your line of credit remains in place in case you ever need it again. In most cases, the bank hands you a checkbook; as you write checks to pay your bills, each check amount is charged against your account.
Unfortunately, when you’re already having trouble paying your bills, you probably have damaged credit, which makes it that much more difficult to obtain the loan you need to consolidate your debt. You may need to look at other means of consolidating, like getting an unsecuredor secured loanfrom a lender:
An unsecured loan allows you to pay off the old debt and make one monthly payment to the bank.This kind of loan may be difficult to obtain if your credit is bad and you’re in trouble already. The bank may require a cosigner or some additional security.
A secured loan requires that you put up some form of collateral so the bank has something it can take from you and sell to cover the debt.What the bank accepts as security varies from one bank to the next, but your bank may allow you to pledge stocks, bonds, rare coin or stamp collections, jewelry or other valuables, or vehicles. This may allow you to borrow money against items that you don’t want to sell right away. When you pay off the loan, the bank releases its interest in your collateral, and you’re on your merry way.
Which is best — a secured or unsecured loan? That really depends on your situation. Discuss your options with a qualified loan officer or mortgage broker in your area. (Chapter 12 offers some tips on finding and selecting a loan officer or mortgage broker.)
The loan, whether secured or unsecured, allows you to lower the monthly interest payment and give yourself a bit of a cash flow break. In Chapter 6, we ask you to imagine cash flow in terms of a hose pouring water into your house while a spigot at the bottom lets it out. Consolidating debt gives you a little more control over that spigot, letting you slow down the outbound flow, so your income can begin to catch up. You can always open the valve and make a larger monthly payment, but if finances are tight this month, you can make the minimum payment and still survive.
Whenever you’re borrowing money and asked to sign on the dotted line, read and fully understand the documents before signing them. Know what the pro- visions are, when payments are due, what happens to surplus funds if collat- eral is sold for more than is required to pay off the loan, and so on. Have your attorney review the document and advise you of any potential issues before you sign.
Consolidating debts is a great rebuilding/restructuring tool. Use it if you can.
If you’re not in trouble quite yet, consider opening a home equity line of credit now in case you need to draw on it in the future. Many of these equity lines allow you to draw up to a certain capped amount, with the full amount backed by your house as collateral. If you don’t draw on the line, you may not be charged, and when you do, the bank charges interest only on the amount you borrowed. You may be allowed to borrow and pay back as time goes on, depending on your loan. Ask around at a couple of banks and pick the program that works best for you and your situation.
Comparing the costs of loans
Although you can select from hundreds of loan types, the bottom line is how much the loan is going to cost you in the long run. The best way to compare loans is to determine the total cost of each loan over the life of the loan:
1. Add up the fees charged to process the loan, including the loan origi- nation fee, points, and closing costs.
2. Multiply the monthly payment times the number of months it will take you to pay off the loan in full.
3. Add the amounts from steps 1 and 2 to determine the total cost of the loan.
4. Subtract the total amount you expect to pay toward principal over the life of the loan.
Ask the bank for an amortization worksheet for each loan, so you can see how much principal you’ll have paid at the time you expect to sell the house and pay off the loan.
The result is the total cost of the loan to you. Now, you simply choose the loan that costs the least.
Don’t focus only on the “low monthly payments.” Consider how much you’re going to end up spending over the life of the loan.