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Understanding Second Mortgages and Debt Consolidation

Debt Consolidation Loans Can Save You Money

Many people think it takes at least two years to get a home equity loan after a bankruptcy. Not necessarily, you may actually be able to qualify for a refinance or 2nd mortgage after BK. You'll just have to pay higher interest rates.

But, rather than worry about trying to get a refinance or second mortgage after a Chapter 13 Bankruptcy or Chapter 7, you could instead save yourself a lot of money and hassle by getting a bad credit secured home equity loan now to pay off collections and judgements or for refinancing high-rate credit cards.

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The interest rates on a debt consolidation loan is a lot less than what you currently pay for your credit cards, especially if you're paying universal default rates--a sudden interest rate hike of 4 to 9 percent to as high as 30%. According to Paul Richard, executive director of the Institute of Financial Education (ICFE) in San Diego, with universal default language written into any loan agreement, all it takes is one late payment to any creditor to have the high, ugly rates kick in.

Debt consolidation loans can help you keep your house by paying your past due debt, saving you from foreclosure and the forced sale of your home. Consumer credit counseling organizations offer debt consolidation, but it could actually cost you more over the long run. And, the monthly payments are generally higher than those of debt consolidation loans.

A secured debt consolidation loan generally comes in the form of a home mortgage refinance (generally not a good idea if you have bad credit) or a home equity loan (second mortgage)--either a secured home credit line (also known as a HELOC) or a fixed rate home equity installment loan. For bad credit debt consolidation, the home equity installment loan is more highly recommended by experts than the adjustable rate second mortgages. There are even some loans that offer additional equity exceptions up to 125% mortgages. (Ask about the HARP 2.0 – rate and term refinancing only - certain restrictions apply.)

For a one-time large expense, like debt consolidation, the fixed 2nd mortgage is typically better because the interest rates are fixed, meaning your payment will not change through the life of the loan. This makes budgeting for the payment much easier and predictable. Home equity credit lines are variable interest rate loans with rates tied to a publicly-available index, such as the Prime rate published daily in the Wall Street Journal. After the introductory period, rates for home equity credit lines generally end up being raisied higher than those of fixed second mortgages. Plus, because the rates vary, your payments will also vary, making it harder to budget each month. And, many home equity credit lines have additional fees you must pay to maintain the account, as well as early termination fees if you pay off the line and close it early.

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