The Cause vs. Symptoms of Financial Struggles
People sometimes think that debt consolidation is a simple solution that will solve the worries of accumulated debt, and put you on the right track toward living within your means. The popular wisdom, for instance, is that if you already have a mortgage, that an equity loan will serve nicely to put your worries behind you.
While there is some validity in this belief, it is important to place importance upon the cause of the problem, not the symptomatic relief. If your debt is a result of medical problems, or a family catastrophe, or a natural disaster loss, then the act of debt consolidation may help you to get back on track.
Evaluating your Financial Lifestyle
But if you find yourself in a constant state of not having enough funds to support your lifestyle, then you may need to fix your lifestyle before deciding what is going to help you. An inappropriate solution may be counter-productive.
For instance, getting a refinance on a home that includes paying off personal credit card debt may compromise your ability to deduct mortgage interest on your home on Schedule A at tax time. Deductibility of mortgage interest depends on several factors, including the fair market value of your home at the time of the refinance. And even if your loan balances are well within the limits of the fair market value, you are only allowed $100K of equity debt in that loan balance for the mortgage interest to be fully deductible.
Examining Your Money Priorities
It’s important to examine your priorities in your lifestyle before deciding on a solution. If you hide your unresolved issues in further debt, then the problem will only get worse, not better.
The quality of your commitment to conquer debt is the most important factor, however. This includes an honest look at why the debt is there.
Common reasons for debt include the loss of a job, a divorce, medical expenses, bad management of a one-time windfall, or simple ignorance about financial reality. Each of these situations, or each combination of them, will require a strategy beyond the initial solution.
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