Debt consolidation is the process of merging more than one debts to a single debt, or taking out one single loan to pay off other loans.
Why you may need to consider consolidating your debts?
First of all, you may think of reducing cash out-flow and making ends meet. This is essentially true for those who find themselves in a hard time.
Secondly, you may want to take advantage of lower interest rate. It is common that unsecured loans have higher interest rates than secured loans and second mortgages have higher interest rates than first mortgages. Or simply the market rates go down. Therefore the current market rates are lower than the rates on your contract. In these cases you may need to take applicable prepayment penalty into account when you make a decision. The bottom line is, the potential savings must be more than the prepayment penalty plus other charges.
How can you consolidate your debts?
While debt consolidation may simply be from a number of unsecured loans into a single unsecured loans, it is more likely involves a single secured loan against an asset that serves as collateral. Most commonly the collateral is a property.
Taking a loan out of a property to pay off other loans is referred as refinance.
The maximum LTV for refinance on an owner-occupied property can be up to 80% without insurance (conventional mortgage) and 85% with insurance (high ratio mortgage), according to the latest regulation issued by federal finance department.
The maximum LTV for refinance on an investment (rental) property varies among lenders. It can be 65%, 75%, or 80%. And there may be premium added to the best interest rate for investment properties, still, depending on which lender your broker deals with on your behalf.
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