If you've accumulated a good deal of debt, now's the time to start thinking about a plan to pay it off. Carrying extra debt costs you money. No one wants to pay more money than needed. There are several possibilities available to you when it comes to decreasing your debt:
- Try is to repay the debt outright.
- Consider what has caused the increase in debt, is it because you are spending more than you make every month?
- Make a budget needs for expenses until the debt has been repaid.
- Figure what must be spent every month on bills, i.e. house, car, utilities, groceries, etc. Cut any unnecessary expenses.
- Use extra money to pay more than the minimum on credit cards. Paying more than the minimum reduces the amount of interest you pay and clears debt quicker.
- Start paying off the higher interest cards first.
- Close some of the credit cardsyou are not using.
- Consolidate all of your debt into one payment if the debt is not large,.
- Find a card running a promotion for 0% interest. Make larger payments and get it paid off before that promotion expires and you can avoid paying interest altogether.
- Consider is a home equity loan. This uses the savings in your home to consolidate your bills, turning them into secured debt. This helps lower the interest rate, gives you one bill to pay a month, and can help increase your cash flow. In addition, the interest you pay every month could be tax deductible, though you should consult your tax advisor to be sure.
Home equities come in two forms: a home equity loan, which is a fixed rate for a fixed term, and a home equity line of credit, which works like a credit card where you have a variable rate, but the balance remains available to you as you pay down the outstanding balance. Each state has rules about home equity products and will vary in restrictions. For example, Texas states that a homeowner may only borrow up to 80% of the value of their home for an equity loan. If they have a first mortgage that they are not rolling over into the loan, then that must be subtracted from the available amount to borrower. So, if the house is worth $100,000, then the total amount available for equity is $80,000. Let's say the homeowner still owes $42,000 on their first mortgage, and they decide not to roll that into the home equity, then the available amount that the homeowner has is $38,000.
In addition, Texas mandates a 12 day waiting period once an application is submitted. This prevents lenders from trying to place liens on the property before documents have been signed and gives the homeowner every opportunity to change their mind about proceeding with the loan. After the 12 days, the homeowner signs the closing documents and then has a three-day right of rescission, which means they can cancel at any time in those three days without penalty. The fees for these loans will vary, although the most common is 1% of the loan amount. Check with the bank as they may have special offers where they pay the closing costs.
While a home equity can be convenient and a great way to reduce your monthly payments and increase your cash flow, you still have to manage your money every month. If you put yourself in a position where you can't make your payments, you risk losing your home to foreclosure. Home equities are a great product if you manage your expenses well, but they still require responsibility with your money management.
Other options you can consider are refinancing your mortgage for a lower rate, borrowing against your retirement savings, or debt management plans. These options should be considered as a last resort. Refinancing your mortgage should only be done if it is going to help save you money every month, i.e. you're in an Adjustable Rate Mortgage (ARM) and the rates just skyrocketed, or the current mortgage interest rate is a couple of percentage points lower than your current loan.
If you're going to use retirement funds, try borrowing against them instead. This will help you avoid severe IRS penalties and allow that money to work towards its intended goal.
Debt management plans can be effective when they are legitimate. However, there are companies promising to reduce your debt by paying them so much money a month. What's happening is is a scam and the debt isn't being paid, and the scam artist keeps your money. Be sure to check out the credit counseling or debt consolidation firm thoroughly.
Be sensible about your debt and you will find a solution that will suit you. If you do consolidate your debt, either with a lower interest credit card or with a home equity, make sure you maintain low credit card balances. Being debt- free is the best way to save money .