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Home Ownership

  • Debt, Home Ownership

    How To Restructure Personal Debt – A Surprising Option

    You may or may not know that restructuring debt is a fairly common practice in business. The reason they do it is to save money by paying less interest on their debt. And by saving money on interest costs, they increase profits. Simple, right? But have you ever considered increasing your own “profit” (aka. discretionary income) by restructuring your personal debt? If you’re like most people, the answer is probably no. The reason you’ve probably never considered it is you never realized you could. The question is, how do you go about it?

    The answer is by refinancing your home mortgage. Of course, that eliminates some people because they either don’t have their own home yet or, if they do, they don’t have enough equity in that home to make restructuring feasible. But if you do have your own home and you have enough equity, here’s how to use that equity to restructure your consumer debt:

    Qualify Yourself

    The first step is to determine how much equity you have in your home. To do that, simply subtract the current balance of your mortgage from the current market value of the home. If your home equity is equal to or greater than the total amount of credit card you have, you might be a good candidate for debt restructuring.


    How It Works

    If you determine that debt restructuring is right for you, the next step is to do a cash out refinance, and use the cash you receive to pay off your credit card and other high interest debt.


    Why It Makes Sense

    Some people will tell you that using cash out refinancing to pay off consumer debt is just trading one debt for another. That’s true. But there are some very real benefits to restructuring in this way:

    • Your mortgage interest is much lower than your credit card interest, so you’re saving money there – a lot of it.
    • Your mortgage payment is much lower than the total of your current mortgage payment and your consumer debt payments, so you’re saving money there too – potentially a lot, depending on the loan terms and other variables that are unique to your situation.
    • You can use the increased discretionary contribute to your savings and retirement plans every month.
    • If your cash out is greater than the amount you need to pay off your consumer debt, you can put that extra cash into a separate savings account designated as your emergency reserve. Having an emergency reserve will keep you from having to use plastic when an unforeseen expense arises.


    A Huge Caveat

    Of course, as is the case with most good things, there is a caveat to using your cash out refinancing to restructure personal debt. It requires ongoing fiscal discipline to be successful. That means avoiding the credit card trap in the future. If you pay off your credit cards in this way, then run up those balances again, you’ll find yourself in worse financial shape than before. So it’s best to just cut those credit card up (don’t close out the account since it could negatively affect your credit), or at least hide the cards in the freezer or somewhere so that you’re not tempted to use it every time you open your wallet of handbag.

    As you consider this option, you should seek qualified professional advice on your specific situation.



  • Banking, Debt, Home Ownership

    The Road to Home Ownership: FHA vs. Conventional Mortgage

    For many people, home ownership is the pinnacle of adulthood. Finally, you’re able to afford a house for yourself and your family! You have your dream home in mind, and you’re ready to take the plunge. First, however, you have to decide on the type of mortgage that’s right for you. Deciding  between a conventional mortgage and an FHA loan can be a headache, but understanding the two can help you make the best choice for your family.

    FHA Loans

    An FHA loan is a loan backed by the Federal Housing Administration. Under an FHA loan, you will receive:

    • Less stringent qualifications, since the mortgage lender will experience less significant losses if you’re unable to pay the amount of the loan
    • Lower down payment requirements
    • Better interest rates over the course of the loan

    This type of loan is intended to help first-time home buyers and others who have less than stellar credit acquire the homes they need. It provides security to both lender and borrower–but at a cost. Individuals who have FHA loans must take out mortgage insurance, including both an up-front premium and monthly payments throughout the lifetime of the loan.

    Conventional Mortgages

    Conventional mortgages are the standard mortgage typically acquired by home buyers. They have:

    • Fairly stringent requirements regarding credit scores
    • Increased down payment requirements
    • Reasonable and expected interest rates throughout the life of a loan

    Conventional mortgages are the option chosen by most home buyers with reasonable credit and the expectation that they’ll be able to pay their loan fairly easily. Most people, when setting out to purchase a home, choose a conventional mortgage without looking back.

    FHA vs. Conventional Mortgage: A Cost Comparison

    An FHA loan looks great up front. Lower interest rates? Where do you sign? Unfortunately, those interest rates don’t always add up to cost savings over the life of the loan. Assume that you’re purchasing a home valued at approximately $150,000. You have 10%–$15,000–to put down on the purchase price of the home. Over the thirty-year lifetime of a standard mortgage, paying approximately $725 per month, you’ll end up paying $261,000 for your home by the time it’s paid for. With a conventional loan, using the same 10% down payment, you’ll pay approximately $625 per month for thirty years–a total of $225,000. That’s a substantial savings over the life of your loan! Manage to scrape up a 20% down payment before you take out a conventional mortgage, and you’ll lower your monthly payment to $555, making the total cost of your loan just $200,000.

     open house sign

    The Loan That’s Right for You

    For most families, a conventional mortgage is the way to go. If you’re able to save up a substantial down payment–around 20% is generally recommended, though you may be able to get a conventional mortgage with a down payment of as little as 5%–and haven’t filed for bankruptcy within the last seven years, as long as you have a reasonable credit score, a conventional mortgage is likely the right choice. On the other hand, if your credit is poor or you’ve had to file for bankruptcy between three and seven years ago, an FHA loan is a great way to purchase the home you’ve dreamed.

    Choosing between a conventional loan and an FHA loan isn’t always easy. If you need additional advice, working with a qualified financial planner is a great way to ensure that you’re prepared for all of the financial challenges that come along with home ownership. By preparing appropriately and doing the calculations to ensure that you’re prepared for both the payments you’ll have to make each month and the final cost of your home by the time the loan is paid, you’ll avoid any unpleasant surprises down the road and make it easier for you to choose the home ownership solution that’s right for you.


    Need to know how much home you can afford?  Use this mortgage calculator to see how much your monthly payment will be. (Click Here For Calculator)