Break Free from Debt!By: Kristie Lorette
While it is typically not the American dream to get into debt, it can be a dream come true to finally dig yourself out of debt. Learn three ways that Americans may be able to beat the debt monster once and for all. The three areas include a mortgage refinance, credit card balance transfers and paying off federal student loans.
While mortgage rates are starting to creep up, they are still at record lows. If you have a high interest rate or an adjustable rate mortgage that is due to adjust, now may be the time to refinance. A mortgage refinance is not the right move for everyone, so you should take some factors into consideration before going through with the transaction. First, consider your interest rate and monthly payment. If refinancing can save you money each month, then it may be worth checking into the rest of the details.
The second consideration is how long you intend to live in the home. Since there are closing costs involved with refinancing, you'll want to determine if the up-front costs are worth the savings down the road. To do this, get an estimate of the refinance costs and divide this amount by the difference between your old monthly home loan payment and your new monthly home loan payment. The result is how many months it will take you to break even.
For example, let's say your old monthly payment is $1,000 and your new monthly payment is $850, a difference of $150 per month. If a refinance will cost you $3,750, then your break even point is 25 months: $3,750 / $150 = 25 months.
If you intend on living in the home at least this amount of time or longer - in the above example, 25 months - then you may benefit from a refinance. Keep in mind that this calculation doesn't take into account all the important factors (i.e. interest rate, mortgage term) that a trusted mortgage banker will weigh in determining if a refinance make sense for you, but it should give you a good idea if a refinance may be at least worth checking into.Credit Card Balances
The killer with credit cards is that your balance is racking up interest. Once you commit to paying down and paying off your credit card balances, there is another surefire way to help you curb the interest.
Start by calling the credit card company that you have the balance with and see if they will consider reducing your interest rate. If they say no, then take a look at the other credit cards you have or consider obtaining a new credit card that offers an introductory rate or a balance transfer promotion with zero percent interest. The key to making this work is to pay off the balance before the offer for zero percent interest expires. In addition, you'll want to consider whether the interest savings is more than the fee required to transfer your balance.
Federal Student Loans
If you recently graduated or are struggling to make your student loan payments, contact the lender and inquire about income-based payments. Income-based payments are calculated based on your current salary or income situation, making for affordable payments that will help you avoid dinging your credit score for late payments or non-payments. Here is where getting out of debt comes into play: once you make the switch to income-based payments, your remaining balance will get wiped out after 25 years. Or after 10 years of working for a non-profit organization, the government or in service positions such as the Peace Corps, student loan debt is forgiven even if you aren't on income-based payments.
While managing your finances is not always easy, getting out of debt may be easier than you think. You have to learn how to manage and maneuver the options that are available to you. Whether it's refinancing your mortgage, getting rid of credit card debt or wiping out your student loans, there are steps you can take to break free. Get started today.
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