Should We Consolidate Our Credit?

Orion’s brokers are asked this all of the time. Before diving into the answer, experienced brokers will tell the client that it is important that each borrower is qualified to borrow money and has the ability to repay the loan. Brokers say that, “We look at the appraised value of the property, the sources of income for our clients, and our client’s credit history.”

What does it mean to "consolidate credit?" In its simplest form, consolidating credit is paying off existing credit obligations with an existing, or new, credit account. For instance, your client has likely received solicitations in the mail from a credit card company offering a very low rate of interest, possibly zero percent, for twelve months if they transfer balances from other credit cards. If your client makes the transfers and pays off other credit card account(s), they are consolidating credit obligations from several accounts to one account.

Brokers tell their clients that it all comes down to the math. For instance, if a client currently owes $20,000 in credit card debt and the average interest rate on this debt is 15%, the minimum payment is probably around $400. $250 of that payment will go toward the interest so in actuality, your client is only paying $150 per month on the debt.

Some creditors (lenders) will offer “debt transfer” offers such as zero percent for 12 months. If a client transfers their existing $20,000 debt to a zero percent interest credit account and makes the same $400 per month payment, they will lower the balance on the account by $4,800 in twelve months versus only $1,800 if they had maintained their cards and payment pattern. Your client should keep in mind after the initial twelve-month period the interest rate will go up and they will likely be paying 15%, or more, in interest-just on a lower balance.

If they are considering using the equity in their home utilizing a “cash-out refinance” to pay off other debt, Orion’s broker’s clients find the math a bit more complicated. When dealing with consumer debt such as credit cards, student loans, auto loans or other non-mortgage debt, a big factor is the extension of the debt being paid off. If consumer debt is rolled into a new cash-out mortgage transaction consider that most mortgages are thirty-year mortgages, so if your client does consolidate credit debt, they are extending that debt to a thirty-year payment plan-unless they sell the home before the mortgage is paid off.

There are other debt consolidation options out there other than these two examples. If your client’s debt is becoming more and more challenging to manage, taking advantage of the current low rates at Orion to provide some financial relief and monthly savings may be the answer. But remember that rate isn’t everything, and that Orion has some outstanding programs to help certain types of borrowers finance their dream home.

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