Americans in Debt

Debt is a fact of life in America, making debt reduction a national obsession. A search for debt relief on Google draws more than 34 million pages; on Yahoo and MSN, the total is more than 12 million pages.

The average American household has $ 9,300 in credit card debt, but the share of income that goes down to credit card debt drops to 0.3 percent.

An increase in personal debt cannot be blamed on excessive spending. After adjusting for inflation, wages have been flat over the past five years while the cost of essential goods and services such as housing, food, medical care and transportation has more than 11 percent according to the Federal Reserve Board’s most recent Consumer Finance Survey.

Housing Debt
Based on this research, the Washington Post recently reported that,

Debt from typical American family income of around $ 45,000 per year rose 33.1 percent from 2001 to 2004, after adjusting for inflation. Housing debt has risen mainly because house prices have risen and people have borrowed against the equity in their homes. From 1989 to 2004, for example, the average mortgage debt more than doubled, from $ 46,900 to $ 96,000.

This refinancing trend is one of the main strategies for debt reduction. It takes several forms: refinancing a first mortgage, a second mortgage, a debt consolidation loan and a home equity credit line. This mortgage can be a fixed rate loan or adjusted interest rate.

Many websites follow the current interest rate and offer free mortgage refinancing applications that match potential borrowers with the best loans based on factors such as credit history, FICO score, type of mortgage and loan size. www.LowOwe.com is a typical site that helps clients reduce monthly home ownership costs through refinancing.

Debt Consolidation Loans
A debt consolidation loan converts a passive assumption of ready equity in cash for debt relief. Easier to obtain than other forms of loan because loans are secured by tangible property. It makes better sense than borrowing against the cash value of a life insurance policy or withdrawing money from a retirement account or 401 (k).

New or refinanced mortgages do not really reduce debt, but they can be restructured in a profitable way. Benefits include: being able to pay off high-interest credit cards and other forms of revolving debt; make home improvements that increase the home market value; have a single monthly payment at a lower interest rate. Another added value is the interest on a home loan or mortgage is usually a tax deduction.

But don’t wait too long for refinancing. CNNMoney.com reported that real estate profits stopped abruptly in the first quarter of 2006, with average US home prices down 3.3 percent from the fourth quarter of 2005. Prices were essentially flat or lower during the quarter as home inventory sold rose and their time spent on the market is extended, according to a survey of 149 markets by the National Association of Realtors.

Even if the FBI continues to raise interest rates, refinancing mortgages and home equity loans will still be the preferred form of debt relief for homeowners who find themselves in financial difficulties. When the national saving rate is below zero, home equity is the only asset many people have.