When should you Consolidate Debts?

[/fusion_text][fusion_text]It’s common today for successful young people to have multiple student loans, a car loan, and a mortgage to balance as they learn to budget and try to save for retirement. It’s often a good idea to see if consolidating any of them can help reduce your interest rates. You might find it hard to analyze whether there are any real cost savings once you factor in each loan having a different interest rate and repayment schedule, not to mention closing costs for a new loan.

Here is my three step process to make this easier. Let’s say you are considering rolling your student loan debt into a refinancing of your home mortgage.

  1. Start by ignoring the time remaining on the various loans. List each loan amount and the interest rate you owe on it. Compare this list to what it would look like after you refinance. Make sure the total interest owed on the loans is much lower than what you are paying today. This eliminates the possibility that you get tricked into a lower monthly payment that is really just extending your loans longer (costing you more interest).
  2. Calculate the closing costs for the refinancing. Don’t forget to include the appraisal.
  3. Divide the closing costs by the interest savings in year one. If the number is greater than three, don’t bother. That number is the payback period for the loan. If it takes more than three years to pay for the upfront costs, you are locking yourself in for too long. None of us know how our lives will change in the next three years, but we know they will.

Does that still sound like too much work? Ask me for help.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]

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