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Debt Consolidation Refinance The Lowest Payment

By Tristan Hunt Published 12/29/2006 | Finance

This week, I'd like to share some customer experiences with one of the most popular new strategies in debt consolidation refinance.  Over the last few months, a select few in the mortgage banking industry have developed programs which allow borrowers to accomplish the 3 greatest goals of debt consolidation: Get Cash to Pay Off High Interest Debt, Lower the Overall Monthly Minimum Payment, and Boost Cash Flow to allow borrowers to save up money in a short amount of time.  The benefits are nearly indisputable: Higher Credit Scores, Lower Monthly Minimums, and Greater Flexibility.  But one of the biggest criticism of debt consolidation is that borrowers who consolidated their debts were still not saving enough money after the refinance, and needed to tap into home equity repeatedly to achieve their final goal.  What if I told you that there is a new loan product available today which allows you to do all of these things, but also allows you to Make No Payments for 90 Days, with 0% interest due over the introductory period?

David in California said what many of you just said, that's too good to be true!  If you can do that, sign me up!  David had a typical Southern California situation, he works in sales, makes a decent living, has a young family of 5 and about 30,000 of credit card and other debt, which cost about 1100 a month in minimum payments just to cover the finance charges on his revolving debt.  But David, like a lot of people in California, has seen solid appreciation year after year in the real estate market, and his home, which he purchased for about 350,000 in early 2003, was appraised for over 500,000 a bit more than 3 months ago.  He owed 300,000 on the house, on a traditional principal and interest mortgage with a minimum payment of 2100 a month.  Because of the relatively high level of consumer revolving debt, David's credit scores had gone down to about 630 even though he was making all of his payments on time.

When David called us, his loan officer walked through each of David's credit card bills a with him, and together they determined that David was paying and average interest rate of over 27% on his credit card payments, because his credit card companies had raised his rates as his overall debts had increased, which had hurt his credit scores badly.  To make matters worse, David, like a growing number of Americans, wasn't saving any money.  If he got sick, had a slow quarter, or was otherwise unable to work for any meaningful amount of time, he would be at risk of financial ruin. 

We looked at the whole situation, and used this new debt consolidation mortgage refinancing strategy to show David how he could pay off all 30,000 of his revolving debt and take out an additional 20,000 or so to provide a small cushion, partially to be used for value-adding home improvement.  Remember, David's old minimum payments were: 2100/month for the mortgage 1100/month for a total of 3300/month, his credit was getting worse each month and he had no cash in the bank.  After refinancing, David's new minimum monthly payment was consolidated and reduced to Less Than 1300 per month Total! And he now had 20,000 in the bank which he wisely put into a high yield savings account earning 5.25% until he needed it.  This monthly minimum payment being 2000 a month lower is amazing in and of itself, however what makes this product revolutionary is that for the first 90 days, David had Zero Percent Interest and No Payments due, allowing him to save substantial money each month.  He socked it away each month for 3 months, and now 90 days after his debt consolidation he's managed to save an additional 10,000, which combined with the 20,000 he cashed out means he went from almost nothing in savings to over 30,000 in the bank earning solid interest.

But what about David's credit?  Now, it's only been a bit more than 90 days since the refinance closed, but I am happy to say (as is David!) that his three scores are now 667, 684, and the high score is 703!  Why? His debt ratio is down, and his debt to income ratio is way down too. Combined with a little advice from our credit specialists, the debt consolidation refinance has been the difference for David.  He went from a total minimum payment of 3300 a month down to under 1300 a month.  He went from 0 in the bank to Zero Percent and Zero Payments for 90 Days, and put over 30,000 in the bank between the refinance and the resulting monthly savings.  Not only does he have some money saved up for a rainy day, the new, lower payment is much easier to make even when times get tough, dramatically lowering his risk of missing a payment.  And because his credit scores have already improved and will continue to do so, any new car payments or loans he takes out over the next couple of years will be substantially less expensive, allowing him to qualify for low cost car leases and zero-interest, cash back credit cards.

So through this illustration, we've explored some of the benefits of using a minimum payment mortgage refinance with no payments & no interest due for 90 days as a debt consolidation tool.  More so than other type of mortgage refinance, this new loan and other mortgages like it help borrowers achieve all of the key goals of debt consolidation, offering great payments and a real "vacation" from making payments.  If you ask David and other borrowers like him what they like the most about the product, they'll tell you it's the "breathing room", the ability to get out from under debt and take a couple of months off of worrying about making the payment so they can concentrate on organizing their finances and improving their situations.  We can all use that space from time to time, and I agree with our borrowers about the importance of this feature.

There are a lot of reasons we consider the "Zero Interest/Zero Payments for 90 Days" plan the ultimate debt consolidation mortgage refinancing tool.  There are some limitations though, which do vary somewhat from lender to lender: While you don't need perfect credit, a minimum middle credit score of 620 is required to qualify for the 90 days with no payments option.  You can borrow up to 80% of the value of your home with no payments for 90 days, with the balance above 80% rolled into a separate second mortgage (or you can keep your existing second mortgage if you have one).  You are allowed up to one 30 day mortgage late within the last 12 months, however you cannot qualify if you have multiple late mortgage payments showing on your credit report over the last 12 to 24 months, and this program is not offered in all states.  Depending on your credit, you may be able to state your income, or even qualify without considering your income.  Contact your mortgage professional for more information, and if they don't have a program that allows you to pay off your debts, lower your payments, and get 3 months off of making mortgage payments all in one, find yourself a new lender!

Our next article in this series will tell the story of a single mother who has impressed us greatly with the way in which she's secured her family's financial situation with this loan immediately following a challenging divorce.  If you have any questions about this article, please feel free to contact us, or visit us online.