Revolving credit cards charge compounding interest. Ditech.com gives the following definition for compounding interest:|
Compounding interest is determined when you add the interest earned in the current period with the principal. You then compute the next period s interest on this new compounded total amount. With compounding interest, the interest charged on the principal is actually added to your principal for the next period.
Debt consolidation loans in the forms of mortgage refinancing and home equity loans (second mortgages), have become popular ways of abolishing credit card debt because of the lower rates and simple interest rate amortization of these loans.
Simple interest is interest paid or computed only on the original principal of a loan, which is why you can save so much money in the long run by consolidating your bills with a cash-out mortgage refinance or second mortgage. Besides, you could deduct up to 100% of the interest you pay on your mortgage refinance or home equity loan, unlike that of credit card and personal loan debts.
With interest rates continuing to quickly rise, a fixed-rate mortgage could be a better hedge against inflation than a variable interest rate loan. If you currently have an adjustable rate mortgage (ARM), you may want to consider a cash-out refinance into a fixed mortgage rate loan.
If your existing mortgage rates are lower than the current market rate, you may want to consider a debt consolidation second mortgage instead. If you already have a second mortgage, particularly if it is a home equity line of credit (HELOC), try a cash-out refinance into a lower fixed interest rate loan or consolidating both into a single fixed rate mortgage refinance.
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