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Should I consolidate my debt into a new loan?

I'm being offered a better interest rate, are there any reasons why I shouldn't consolidate?

Jan 27, 2012 by Justin from Albuquerque, NM in  |  Flag
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A better interest rate is a good starting point, as it alone will reduce your overall interest expense over the life of the loan...BUT...this may not be true when you add in the costs to refinance PLUS the additional interest you may pay if the term of the loan is extended (the term being the due date that the loan is paid up). Many refinancings involve rolling higher interest loans due in 3-5 years into loans not due for 15 or 30 years. Usually, you are better off paying the higher interest loans off in 3-5 years than rolling them in to a lower interest loan due in 15-30 years. The ability to deduct the interest also is an important factor. Most people think their mortgage loan (which many roll other loans in to) is deductible. That is only true if you are able to itemize expenses that are deductible in the first place. If the expenses you can itemize (mortgage interest, state income taxes, property taxes, and charitable contributions being the most broad-based) do not exceed the standard deduction allowed by the gov't in the first place, you are NOT getting a tax advantage. I believe the standard deduction is something like $12000 for a joint return, $6000 for a single, if that helps. Go to IRS.gov to confirm, or consult with a CPA. My point is, yes, there could be reasons not to consolidate, but as long as you understand the above, one of the great opportunities in our economy today is the ability to reduce the interest expense you are currently paying. Just don't let anyone use reduction in your monthly payment as a selling point. Ask them to share the difference in your total interest paid, before you agree to the deal.

Comment   |  Flag   |  Jan 27, 2012 from Peoria, IL

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1 vote

Great answer Robert, Also would borrowing extra money cause you to pay Private Mortgage Insurance (PMI) in addition to the loan?

1 Comment   |  Flag   |  Jan 30, 2012 from Cleveland, OH
Robert Joseph Miller

Good add, Jeffrey. Certainly if your loan is above 80% of home value the bank may require the PMI until it is paid down to below 80%, and this cost would need to be added in to the calculation.

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Flag |  Jul 09, 2012 near Peoria, IL

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