Debt consolidation offers a number of key benefits to help make outsized debt easier to manage. Even better, armed forces personnel who currently have VA home loans can take advantage of Military Debt Consolidation Loans (MDCLs), which carry lower interest rates and fees than general market consolidation loans.
Here’s how military debt consolidation loans work.
What is an MDCL?
Functioning largely the same as a consumer debt consolidation loan, MDCLs can be used to pay off all sorts of unsecured debts. These include, credit cards, medical bills, payday loans and the like.
This enables the borrower to convert multiple monthly payments into a single one, usually at a better interest rate and with better terms. These cash out loans refinance your existing VA home loan for more than its current outstanding balance.
You’ll then use the proceeds of the loan to pay off the original loan and use the rest of the cash for whatever purpose you desire— such as in this case to pay off high interest debt. Just bear in mind, as with any other type of home equity-based loan, there are closing costs to consider as well. Your ultimate our cash out amount may be less than you anticipated.
Qualifying for a MDCL
A useful tool for easing debt trouble for military vets and active duty personnel, the qualification requirements from a MDC are as follows.
- Ownership and an equity position (the value is higher than any outstanding loan amounts) in a property.
- A demonstrable ability to repay the loan when required.
- A certificate of eligibility for a VA-backed loan.
Other important considerations include a debt-to-income ration capable of supporting the payments on he loan. In other words the percentage of your income already apportioned to debts must be low. If it appears you owe more than you can repay, your application will be denied. Along with a solid income, most lenders will want to see a good credit history.
Some of the fees you might encounter with a MDCL include loan origination fees of up to 1% of the loan amount. Appraisal fees will be assessed as well, as the value of the home against which you’re borrowing will need to be established. You may also encounter recording fees, credit report fees, survey fees and attorney fees (if any of the above are needed for any reason to complete the transaction).
Pros and Cons of Military Debt Consolidation Loans
Pros of MDCLs include much to offer in terms of positives. The qualifying standards, while stringent, are more relaxed than those for private consolidation loans from banks, credit unions and other financial institutions.
Credit score and debt-to-income requirements for example, are much lower. This means they could substantially increase the amount of cash you’ll have on hand after satisfying your monthly obligations. You can learn more about this from Freedom Debt Relief.
Repayment terms are longer, and you can get up to 100% loan to value against your home. Mortgage insurance premiums are waived, as are prepayment penalties.
Cons of MDCLs – In some cases, even though closing costs are lower than those of conventional loans of this type; they could still outweigh the savings you’ll achieve from effecting a consolidation. In other words, the closing costs could make doing a consolidation not worthwhile. It’s important to do the math before pursuing this strategy to be certain you’ll come out ahead.
As mentioned previously, and we cannot overstress this point, there is also the potential to lose your home if you cannot make the payments.
Another consideration, the equity in your home will be consumed to pay off your debts, this means it won’t be available to use for other purposes—such as the down payment on a rental property.
A Highly Important Consideration
You must gain a clear understanding of how you got into credit card debt trouble in the first place. This is key to ensuring you don’t foment a recurrence of the problem.
It is also absolutely essential to recognize that while a Military Debt Consolidation Loan might appear to pay off your credit card debt, it does not do so. The MDCL simply restructures your debt; you still owe the money, although repaying it should be easier.
Moreover, after using a MDCL to consolidate credit card debt, you will have a stack of credit cards at your disposal—all with zero balances. Resisting the urge to use those cards will take a great deal of discipline. Otherwise, you’ll run those cards up to their limits—again—with no fall back position this time.