Sunday, March 5, 2006

How to Convert to a Fixed Rate

Effective debt management is critical for the success of any financial plan. When your debt is under control, you can save money on interest expenses and improve your cash flow. Learning how to refinance debt is part of the credit management process. When refinancing, you may take out a new fixed-rate loan and use its cash proceeds to pay off variable rate debt. As a result, you would have effectively converted outstanding debt into a fixed rate. For this refinancing technique to be effective, you must learn to monitor interest rate trends.

Instructions

    1

    Differentiate between fixed and variable-rate debt. A fixed-rate loan charges the same interest rate throughout its term. A variable-rate loan, however, features interest rates that shift alongside the economic environment.

    2

    Identify the federal funds rate as a benchmark for all interest rates. Banks borrow money from other banks at the federal funds rate to meet their Federal Reserve requirements. For consumer loans, banks demand higher interest rates relative to the federal funds rate as compensation for the increased risks of dealing with private individuals.

    3

    Gauge the strength of the economy to anticipate interest rate trends. In recession, the Federal Reserve works to lower interest rates through its federal funds rate. Lower interest rates encourage people to take out loans and spend money. When the economy resumes growth, the Fed drives rates higher to guard against inflation.

    4

    Order a copy of your credit report from Experian, Equifax or TransUnion. Verify that your report's information is correct, prior to refinancing debt. Each credit-reporting agency provides online resources for you to file disputes.

    5

    List out your current debts according to interest rates. Work to pay your most expensive loans down to minimal levels, while also saving up six months worth of living expenses in cash. You improve your chances for fixed-rate loan approval at a good interest rate with these transactions.

    6

    Classify the type of debt that you wish to refinance, e.g., converting an adjustable-rate mortgage into a fixed-rate mortgage. Contact your current lender and ask if it will refinance the variable-rate debt into a fixed-rate loan.

    7

    Apply for fixed-rate loans at three separate banks. Make the banks compete for your business, and use the lowest interest rate offer as a negotiation tool.

    8

    Take out a fixed-rate loan with the bank that offers the lowest interest rate. Use the cash proceeds from this loan to pay off your old variable-rate debt.

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