How to Use Loans to Build Your Financial Future
Planning for your financial future is important, regardless of where you are in life. An immediate plan typically includes creating a budget and prioritizing spending between needs and wants. A common medium-term goal is paying off high-interest debt, like credit card balances and payday loans, while a long-term goal may include saving enough money to retire comfortably.
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1. Refinance Your Mortgage
Refinancing your mortgage is one way to potentially change the terms of your home loan and take advantage of new opportunities. The key is to have a clear goal in mind when you consider refinancing, whether it's to lower your monthly payments, reduce the duration of your mortgage or tap into equity for home repairs or debt repayment.
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There are a few ways to refinance your mortgage: Rate and term refinance, cash-out refinance and a combination of the two (also known as "rate-and-term plus"). With a rate-and-term refinance, you essentially replace your existing mortgage with a new one for the amount remaining on what you owe, which typically comes with better terms than your previous loan.
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This type of refinance might make sense if you're in a position to take on a longer mortgage that will allow you to pay off the balance in the time before you retire. It also may make sense if you have a fixed-rate mortgage and rates are low, allowing you to save on interest in the long run.
A cash-out refinance is a more popular option that allows homeowners to tap into the equity they have built up in their home. This can be done to help finance a variety of expenses, including a down payment on a second home, paying off credit card debt, making major home improvements or even taking a dream vacation.
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You can also refinance your mortgage to remove private mortgage insurance, if you've built enough equity and qualify to do so. It's important to understand how your mortgage affects your credit, so you can make the best decision for your financial situation.
Whether you're planning for the future or looking to build your savings, refinancing can be a smart move. If you're ready to learn more, check out the resources available on Pennymac's website and talk with a qualified Loan Expert. Or, try the free Freddie Mac CreditSmart(r) Essentials online curriculum to help you plan and achieve your financial goals. You can also check your FICO(r) score for free through Experian to see where you stand.
2. Consolidate Your Credit Card Debt
The debt consolidation strategy combines multiple credit card balances into one single account that you pay on time every month. The result is a lower total interest rate and the ability to make more progress toward becoming debt-free. Various methods exist for consolidating your credit card debt, including debt consolidation programs, personal loans and 0% intro APR offers from balance transfer credit cards.
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To qualify for a debt consolidation loan, you generally need good to excellent credit. However, it may be possible to find a debt consolidation program that requires a slightly lower credit score.
If you have significant equity in your home, a mortgage or HELOC may be the right option to help you pay off your credit card debt. This type of secured debt requires the use of your home as collateral and typically offers interest rates that are well below credit card rates. However, this method also comes with closing costs and fees and requires you to put your home on the line if you fail to meet payments.
Another option is to seek out a credit counselor. These experts typically offer free or low-cost advice on how to pay off your debt and negotiate with creditors. If you're considering this option, it's important to be aware that closing accounts during the debt consolidation process could have a negative impact on your credit score, which is determined in part by the mix of types of accounts you have open and how long each has been open.
Regardless of the method you choose to pay off your credit card debt, it's critical to address the root causes that led to your overspending. Otherwise, you're likely to find yourself accumulating more debt on top of what you currently owe. For example, seeing a large available credit limit on a new card could encourage you to spend more, especially if it's an easily accessible source of funds. To prevent this from happening, you might consider speaking with a financial therapist or a certified credit counselor to determine the best way forward.
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