If you choose to refinance your mortgage in order to consolidate debt, then this option is tempting. Conversely, if you want refinancing and debt consolidation to work for you, it is important you are familiar with the potential drawbacks. Read on and discover the different factors involved in this as well the advantages and disadvantages, which will all help you in making the decision.
The obvious demand is mortgage rates, which are generally lower than interest rates on debts. If you are someone with equity on your home and choose to refinance, then you can borrow this equity in order to pay off debts, such as personal loans and credit card debts. The Federal Reserve states that credit cards were charged 13.14 percent during the times the 30-year mortgage rate was at 4.20 percent, which was just recently. This means the likelihood of lowering interest on your debt is clear. If you choose refinancing and debt consolidation, multiple payments will be replaced with a single mortgage payment, which simplifies your finances.
The problems with refinancing and debt consolidation are the fact stakes are raised. The mortgage debt openly puts your house at risk even though credit card debt along with other obligations usually cannot lead to claims against your home. Another problem is you could be lengthening the period of your obligation by adapting short-term consumer debt to mortgage debt.
One thing you must do is focus on refinancing and debt consolidation, which is why the list below helps to outweigh the potential problems and gives you a list of the matters you must observe.
- 15 year and 30 year options
- Prepayment penalties and closing costs
- Comparing mortgage quotes
- Meeting the new payment schedule
- Interest cost
- Mastering budget issues
When you look into your equity for refinancing and debt consolidation that is only when you will know how much you have. If you have a large amount, then this obviously means you are into numerous years into your mortgage. If you do find yourself in this situation, then you may want to consider getting a low refinance rate, which happens by refinancing to a 15-year loan.
When it comes to refinancing and debt consolidation, the most compelling part is comparing the interest rate. One thing you need to ensure is the interest rate gap covers the costs that are part of refinancing. This includes prepayment penalties on your loans and mortgage.
We all know that refinance rates tend to be lower than usual, but this does not mean they are all the same. The best way to go into refinancing and debt consolidation is to shop around for mortgage quotes.
The risk usually arises with meeting the new payment schedule. Once the terms and principals of your new loan have been worked out, it is important you look into the payment schedule that will be the outcome.
You need to ensure that refinancing is not costing you more, even if you are lowering your interest rate. This can happen because you may be paying less interest, but at the same time, this could lengthen your repayment period, which is why you need to check.
If you choose refinancing, this does not mean you can easily take on more debt. You need to start mastering your budget and live within your means. Refinancing and debt consolidation is a good idea, but does have its pros and cons.
The main reasons to why people consolidate debts are to:
- Reduce monthly payments.
- Cope with a single payment instead of multiple payments.
- To save money in the time costs and interests are low than that of the old loan arrangement.
In the short term, this may be a good idea; however, some of the cons include:
- In order to get out of loans you already have, you may have to pay exit fees.
- The charges and fees of maintaining and setting up the new loan can be more expensive.
- Changing your debt from unsecured to secure over your home, will decrease the equity of your home, which makes everything more expensive, as you will be paying off debt for longer.
Before you consider this option, it is important you seek some help and advice from a reliable service. Some lenders are better than others are, as they are all not the same. One thing you do not want is to become victim to a fraud-type lender. You will know this if they charge you with higher interest, which will ruin your current situation, making it worse. This is why you should seek help from a trustworthy service, especially if your home is security. Some lenders may only refinance on an interest only term, which is usually for one or two years. Under this arrangement, the individual usually has a corresponding level of debt at the end of the loan, even though they have made all the necessary payments.