Free at Last!

You, too, can find financial freedom through debt restructuring

BY LISA SCONTRAS

Jim Johnson had a pile of bills, two auto loans and a mortgage to pay every month. The payments were eating up such a large chunk of his monthly income and no matter how much he and his family scrimped, he was rarely able to make more than minimum payments. What was worse, the balances never seemed to go down.

Sound familiar? Johnson’s predicament of trying to dig his way out from under a mountain of debt is a common scenario, according to Leonard P. Fernandes, assistant vice president of the mortgage banking department at First Hawaiian Bank.

“Most people have multiple credit and department store cards on top of their mortgage and auto loan,” says Fernandes. “I am not normally an advocate of using your home to acquire debt, but if you currently have high-interest bills, plus some personal loans and auto loans that you are having difficulty paying down, you may be able to restructure or consolidate your debts and lower your total monthly payments.”

For the Johnson family, the solution was fairly straightforward. They refinanced their 30-year, 5.75 percent fixed rate loan for a new 4 percent loan. At the same time, they were able to pull out enough money to pay off their other debts and still have a manageable monthly mortgage payment.

Restructuring your debt, like the Johnsons did, can reduce the amount you owe and lower your monthly payments at the same time making your money work smarter and more efficiently. By refinancing your first mortgage at a lower interest rate, and paying off high-interest loans, you can put more money toward your principal balance instead of only paying interest. While it is not a cure for out-of-control spending, consolidating debt by taking a low-interest loan to pay off several high-interest debts can be your ticket to financial freedom.

“More bills means less disposable income to meet the normal monthly expenses and that may also cause bills to increase,” says Fernandes. By using the equity in your home, you can take control of your finances and make a structured plan. Instead of having five revolving balances that seem to never decrease, you can start to see principal balance reduction.

“Some people find it easier to pay only one bill per month instead of paying six or seven,” he says. “Debt consolidation can combine all the bills into one account.”

This type of debt restructuring borrows against your available home equity, so the first step is to scrutinize the terms of your existing mortgage. Today’s 30-year fixed-rate is

3.79 percent with 2 points. How does that compare to your current mortgage payment? What would your new monthly payment be? Does that help to pay the bills? Maybe what you really want to do is to reduce the term to pay the mortgage off in 15 years.

“There are times when a person may have two car payments that total $1,400 a month and their mortgage payment is $1,200 a month,” says Fernandes. “Plus, they have another $700 in credit card expenses per month. Total monthly cost is $3,300. Let’s say you have paid on your 30year mortgage for nine years already. In this case, by consolidating all your loans, you may be able to take the mortgage from the 21 years remaining term to a new term of 15 years, paying off the loan faster and reducing the total monthly payment.”

For others, shortening the term of the loan is not possible because the payment increases. But it makes sense to analyze the type of debt you currently have to see what options are available to structure debt differently.

“Are you looking to make just one payment?” asks Fernandes. “If the only bill you have is a mortgage, it is much easier for you to focus on paying off your expenses as you incur them.”

Fernandes cautions consumers to only keep a couple of credit cards after the balances are paid off.

“It is very important to close unneeded credit cards following a debt consolidation,” he says. “This way you can avoid annual fees and also avoid the temptation of charging on these cards.”

Interested in the possibilities? Take a look at the refinance calculator on First Hawaiian Bank’s website, www.fhb.com/loans_calculators.htm.

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