How to Decide If Consolidating Loans Is Best

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As the economy struggles, consumers are finding it harder to meet their debt obligations. The auto loan default rate could increase as much as 33% by the end of 2008, for example. And while foreclosures recently trended downward, they are still up 53% from this time last year.

If you're struggling under a heavy debt load, consolidating your loans by refinancing your mortgage may provide a solution.

Refinancing a mortgage to pay off debt is one way you can lower your monthly payments. Mortgage rates are generally lower than rates for other types of loans because a mortgage is considered secured debt -- for example, your home acts as collateral for the loan.

Meanwhile, credit card debt in particular tends to carry very high interest rates because it is considered unsecured debt.

The first step in deciding whether to consolidate involves sorting out how much you owe and how much you are paying each month. Next you need to figure out how much you stand to save if you pay off your debt by refinancing with a new mortgage. The online Mortgage Debt Consolidation calculator from BankingMyWay.com can help you wrap your head around both sets of numbers.

The calculator works by using the details from your existing debts (credit card, mortgage, car loan, etc.) to figure out your overall monthly payment and the amount of your outstanding debt. By entering the interest rate and term of your new mortgage, you can see how much you'd stand to save in monthly payments.

Say you are looking to consolidate credit card debt, a car loan and your existing mortgage. You carry $5,000 in long-term credit card debt at an 18% interest rate and you pay $200 on it each month. You also have a five-year, $15,000 auto loan at 7.5%, and you've managed to make two years worth of payments at $301 a month. Finally, you have 15 years left on a $200,000 30-year fixed rate mortgage at an interest rate of 7.51% with monthly payments of $1,400.

All told, your monthly debt payments add up to $1,901 and your overall debt is $165,585 with an average interest rate of 7.83%.

If you refinanced your existing mortgage with a $165,585 15-year fixed rate mortgage at 5.91% (the current rate for a 15-year fixed rate mortgage according to Freddie Mac (FRE), your monthly payments drops to $1,388.37. That's $512.63 less than what you are paying now. Overall, you stand to save $19,243.75 in interest by the time you have paid off all of your debt.

The report provided by the calculator also indicates that additional tax savings are available by deducting the interest on your new mortgage -- $3,135.70 in the first year, in this example. However, this calculation doesn't take into account any tax benefits from your original mortgage, and assumes that you itemize your deductions on your income taxes.

When contemplating refinancing, you should also take into consideration the closing costs for a mortgage -- typically anywhere from 2% to 3% of the loan amount. To get a feel for how closing costs might affect the calculation, you can add your lender's best estimate of the costs onto the amount of the new mortgage loan.

Let's say closing costs were $4,000 in this example. Adding that amount to the $165,585 would increase your new loan amount to $169,585 and your monthly payments to $1,421.91. Your monthly savings drop to $479.09 a month.

Saving an additional $500 or so a month can help put you on the path to financial health. But while the calculator can help you sort out the numbers involved, it can't help you make changes in your behavior to keep you from falling back into debt. For more help, you can contact Consumer Credit Counseling for free debt management counseling.

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