Debt Consolidation
You don’t have to have a mountain of debt to benefit from a debt consolidation loan. Even if you have just a few credit accounts there may be several good reasons for considering a debt consolidation loan.

The most widely known reason people obtain a debt consolidation loan is to take out a single, lower interest loan and use it to pay off all of your creditors. That way you can concentrate on one monthly payment and pay off what you owe much faster and at a lower interest rate. By paying off all of your debt most people also experience an improvement in their credit scores. (see credit and scoring on this site) Higher credit scores allow you to better qualify for all types of financial products such as auto, insurance ,personal, and mortgage loans. By repositioning your debt to a debt consolidation loan you may also benefit by gaining a much needed tax break.

Consolidating your debt can help you get closer to financial freedom but it takes careful planning and the discipline to follow through. You can make it work by successfully following these four important rules.

Rule 1: Establish Your Debt Load
On a spreadsheet or a piece of notebook paper make a list of all your current debts including your rate, balance, and monthly payment.

Creditor	Balance	Payment
Mortgage	$150,000	$985
Car Loan	$15,000	$400
Department Store Card	$3,000	$300
Credit Card	$5,000	$250
Total:	$173,000	$1935

By going through this exercise you begin to get a better idea of your current situation. In this case you would need a loan of $173,000 to pay off all of your debt. You will also get a better read on exactly how much you are paying each month. In this example you would be looking for a mortgage payment less than $1935.

Rule 2: Determine the Best Loan Program for You
There are several different ways in which you can approach your debt consolidation. Develop a list of options that may work well for you and review them with one of our mortgage bankers or another trusted advisor. The most common programs are

• Cash out Refinancing:
This involves taking out a new mortgage on your home that is larger than your current one. In our above example you would need to increase your loan to $173,000 using the extra $23,000 to pay off your credit cards and the car loan. Even if your current monthly mortgage payment increases, it will still be less than the total monthly payments you were making prior to the new loan. If the conditions are right, you may even be able to work out a program in which you can pay off your mortgage in 15 years or less.

• Home Equity Loans and Lines of Credit:
Offer low introductory interest rates because they are secured by a second mortgage on your home. And, because home equity lines are a type of mortgage, the interest that you pay may be tax-deductible. For more on Home equity loans click here.

• A Personal Loan:
A personal loan can be used to consolidate debt if you don’t own a home, or if you don’t want to use your home as collateral. Interest rates on personal loans run higher than traditional home loans or home equity lines of credit, but are usually lower than credit card rates. There is no interest deductibility with personal loans.

Rule 3: Implement the Plan
Now that you have figured out the best loan program for you, sit down and develop a timeline for paying off your debt.

If you refinance your current mortgage and personal loans to a new mortgage on a fixed term, you’ll know exactly how long it will take to retire your debt. If you decide to use a Home Equity line, you will only be required to make a minimum payment each month. Paying the minimum payment may not reduce your debt.

Keep in mind that the interest rate on a home equity line is variable so you will need to review your plan from time to time as the interest rate changes. To stick with your timeline, you may want to consider an automatic withdrawal from your bank account.

Rule 4: Control Your Spending

Debt consolidation only works if you maintain your discipline and resist the temptation to run up your credit cards again. Getting out of debt is not easy, and it won’t happen overnight. However, if you stick to your plan the rewards of being debt free are well worth the effort.