Should You Try a Debt Management Program?
In an era where frugality is in and a rocky economy has left a lot of families feeling shaky, many consumers are considering two main methods for decreasing debt: mortgage refinancing and debt management programs.
For homeowners who qualify, refinancing can be the best option since the result of a home refinance is often lower monthly payments. With less money going from the household income to housing payments, other debt can be paid more quickly. An even better choice for homeowners with substantial equity is a cash-out refinance which allows them to take the equity in their home to pay off as much as possible of other debt. But be warned that lenders are slow to approve a cash-out refinance in today’s tightened credit market unless the homeowners have 20% or more equity in their property.
The key problem with refinancing in order to reduce debt is that many homeowners with too much debt are not able to qualify for the lowest home loan rates. Some may not qualify at all for a mortgage refinance and need to increase their credit score first by decreasing debt.
Debt Management Programs: Can They Help You?
A debt management program developed by a credit counselor may seem like a good solution since these programs typically allow you to make one monthly payment to them while they pay your creditors. Usually the credit counselor works out a lower interest payment and lower monthly payments so that you can get out of debt more quickly.
While getting out of debt is always a good idea, your credit score may take a hit if you enroll in a debt management plan. In today’s tough lending environment, a lower credit score might disqualify you for the best interest rates on your refinance, which means you don’t save as much money as you had hoped.
Debt management programs–which typically negotiate lower rates with your creditors and consolidate your payments into one monthly sum–may be a good choice for your if your debt is too high for you to meet your monthly payments or if you lack the discipline to stay on track with your debt reduction strategy.
Whether debt management is right for you depends on your debt, your personality, and your mortgage refinance goals. If you need to refinance to lower your monthly payment, the higher interest rates associated with debt management may make that goal difficult. If you are able to qualify for a mortgage refinance without pursuing debt management programs, you may be able to use the savings to pay down your debt without the hit to your credit.
