Eliminate All Debt, Even The Mortgage Debt
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Eliminate All Debt, Even The Mortgage Debt

Mortgage Debt Consolidation could be your key to becoming completely debt-free.

America is plauged with consumer debt to the tune of $2.04 trillion (not including mortgages), more than doubling that of 10 years ago- that's $19,300 per U.S. household and rising.

The problem is American consumers believe they can 'borrow' their way to prosperity. No one likes to be indebted to another, and the intention always is to pay off the debt sooner than later. However, statistics show that more than 60% US households merely pay the minimum payments due on their debts; increasing the financed balance over the life of the loan by 4 times and requiring more than 30 years to pay off a simple credit card under $1,000. At this rate it is no wonder why bankruptcy rates are at record highs (over 1.25 million in the first nine months of 2003 alone)- caused by over-spending or borrowing, and under-saving and preparing for the future.

What's surprising about the nation's debt is that it has continued to rise despite record numbers of mortgage refinancing from 2001 to 2005, many of them yielding cash that consumers have used to pay down credit card balances. Despite the pay-down through mortgage debt consolidation the spending and borrowing habits continue to grow, and the bankruptcy rates continue to climb.

Why do American families continue to get so deeply into debt- even with interest rate record lows for home refinances?

With the Great Depression generation passing on, we are losing those hard-earned values towards fiscal responsibility. Quite simply, American families lack the discipline that many of our predessesors held close to them. We now have an entire generation that doesn't know anything about careful and thrifty spending. The prevailing mindset that started in the 80's was to have more than our parents, and to get it alot quicker. Banking institutions answered the call and now American families suffer with a debt-load greater than is bearable, with no realistic relief plan in view.

It does not matter how much debts are consolidated or balances reduced, consumer appetites will only continue to spend and accumulate more debt. In reality, the massive refinance boom that "reduced" alot of consumer debt into one home loan did not make a more debt-free US; it merely freed up the ability to go out and acquire more debt through more spending. Therefore the total US household debt has merely contiued to rise since 2001.

Such wreckless and unmanaged consumer spending not only destroys households, it destroys the community and the threads of society as a whole.

What can be done to relieve the US consumer debt epidemic?

We know that simply rolling debt into new debt, whether by mortgage debt consolidation or by credit card balance transfers, has not solved the problem; it merely creates a "feeling" of security for a short season. Once the consumer realizes they have freed up buying power the appetites that got them in debt in the first place begins to take control, whether by greed or "need".

The solution has to come from the consumer's ability to permanently curb spending appetites and gain control over the current debt burden. People need to understand the econmics of need-driven budgeting. However, very few individuals are personally capable of training themselves to become something fiscally they were never taught or understood. This is why so many Consumer Credit Counseling-type companies have become so popular. They, like financial planners attempt to educate, reform, and redirect.

Some of their tactics involve debt negotiation and debt consolidation. They utilize these methods because they understand most consumers in debt have more debt monthly than they can handle. Thus, debt negotiation for accounts that have excessively high interest rates or monthly payments, and debt consolidation using home equity or other non secured loans. These tactics can help to dramatically change the debt load monthly.

Before we can answer what needs to be done to put an end to the debt epidemic we need to understand what hasn't worked:

Problems with traditional Consumer Debt Companies

Debt Negotiation Programs

These companies negotiate away a portion of the debt and then proceed to make payments in behalf of the debtor to the creditors under new "improved" terms.
Negatives:

1. The negotiating is reported to the Credit Bureaus and graded against the credit risk score as a negative. Banks review debt negotiation reports the same or worse than bankruptcy.
2. They may require that the debtor stop paying the creditors and start to make payments directly to their debt negotiation company. Many creditors either refuse the third party intervention or the new terms are miscommunicated in their entirety. The result is the debtor ends up paying monthly without the creditor getting any or part of the payments, and in turn owes late fees and back interest. In addtion the credit bureaus will receive reports from the creditor of late payments and/or charge off status further cripling credit ratings and history harming credit worthiness.

Credit Counseling and Debt Management Plans

Credit Counseling: Many are non-profit organizations that work with the consumer to advise them of correct management of money and debts, help develop a budget, and offer free educational materials and workshops.
Debt Management Plans: If the financial problems stem from too much debt or the inability to repay the debts, a credit counseling agency may recommend the consumer enroll in a debt management plan (DMP). DMP can assist in working out a repayment plan with the creditor in effort to get in good standing or relieve maximum payments or balances.
Negatives:

1. Just because an organization says it's "nonprofit," there's no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make "voluntary" contributions that can cause more debt.
2. Like Debt Negotiators, often working out a repayment plan in lieu of the debtor will have the same negative impact on credit reporting histories and risk scores.
3. While information is power, many if not most of those who gain the education these organizations offer are able to utilize practically, correctly, or even permanently the principles learned.
4. Budgeting and learning correct money management for the future is necessary, but will not help the consumer who needs immediate assistance reducing monthly payments to creditors.

Protect Yourself- Be wary of credit counseling organizations that:

• charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
• pressure you to make "voluntary contributions," another name for fees.
• won't send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
• try to enroll you in a DMP without spending time reviewing your financial situation.
• offer to enroll you in a DMP without teaching you budgeting and money management skills.
• demand that you make payments into a DMP before your creditors have accepted you into the program.

Mortgage Debt Consolidation

Consolidating debts by tapping into home equity allows the consumer to immediately relieve monthly debt payments, decrease the amount of total interest paid, and enjoy certain tax advantages that are not available with other kinds of credit. When used correctly, with a plan, debt consolidation can be powerful. However, it is often misunderstood to be the cure-all, instead of a means to an end that takes a change in behavior; thus the following cautions apply:
Negatives:

1. Refiancing your home will restart the amortization clock on when your home will be paid off- increasing interest paid since the majority of monthly payments to principle and interest during the first 15 years go to interest.
2. Consolidating consumer debt into a mortgage means that you are guanteeing payments of the debts against your home. If you can't make the payments - or if your payments are late - you could lose your home.
3. The consumer is left with a mortgage debt that will linger for 15 to 40 years and pay interest at least 4 times that of the amount financed.

Financial Planners

Similar to Mortgage Debt Consolidation, the financial planner devises a way to free up cash through debt consolidation and lower

For more information on these type of programs go to the FTC website regarding facts for consumers and debt.

What is the answer to permanently getting out of debt in a reasonable amount of time?

Create a Debt Elimination Plan without shelling out the bucks

The short answer is get a plan and stick to it. This usually requires a complete change of behavior for many American consumers. The longer answer is found in learning how to create a Debt Elimination Plan (DEP) that works for you, writing it down, and following it tenatiously until its goals are met. DEPs do not mean that the consumer needs to earn more money or invest in expensive programs established by third parties. A family can learn to get completely out of debt in 6 to 10 years, including their mortgage without any money out of pocket.

The quickness of how fast one gets out debt completely is a funtion of how much consumer debt one has currently and how disciplined they can become to cut out frivilous monthly spending until they are out of debt. The fact of the matter is, only about 10% of the people who try a DEP will actually succeed without the assistance of an outside party. However hard it may seem to some it is still reasonably possible. For complete information on one approach to a DEP that doesn't cost anything go to an article by Micheal T Killian at about.com on How to Make a Debt Elimination Plan.

The above article links to an eleven-step process on how to personally create a DEP from scratch without any investment on the consumers side. The process can acutally be accellerated with proper application of debt consolidation techniques through mortgage refinancing. The difference in monthly savings should be applied to other debt, and eventually the mortgage till all the debt is paid to $0 as How to Make a Debt Elimination Plan suggests. The rolling of the consumer debt into the mortgage will also give a much lower effective interest rate (see the calculator) when tax deductions for mortgage interest payments are calculated in; which adds to the appeal of mortgage debt consolidation. To learn more about creating a Debt Elimination Plan from one of BalboaMortgage.com's financial loan consultants please contact us.

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