Homeowners faced with a substantial amount of debt may decide to refinance their home. Debts that are typically high in interest, for example, credit cards, may be consolidated with lower interest home refinancing. The difference between the two interest rates can be quite significant. There some issues that need to be addressed before deciding to refinance for debt consolidation purposes. They include comparison of interest rates and loan terms, together with the homeowner's present financial circumstances.
This article will explain the definition of debt consolidation, as well as recommend approaches for the topics of loan terms and current financial circumstances.
Debt Consolidation
The description "debt consolidation" may be misleading. Refinancing for debt consolidation does not mean the homeowner is merely combining their debts. A dictionary explanation of consolidate is to "unite, combine, merge". With debt consolidation refinancing, the homeowner in fact takes out a new home loan to pay off all of the outstanding creditors. These creditors can range from automobile dealers to credit card companies. The homeowner's level of debt will remain the same. The homeowner is then responsible for repayment of the new loan.
Once the refinancing is complete and all the creditors have been paid off, the homeowner is now locked into the terms and conditions of the refinancing loan. All terms and conditions associated with credit issued by previous lenders are no longer in effect. As well, interest rates applicable to the refinancing loan will now apply versus the past creditors' interest rates.
Will Refinancing Cost More Long Term?
There are two different aspects to consider before debt consolidation refinancing. Is the end purpose to reduce monthly payments? Or is it to increase interest savings? It is necessary to decide the reason for refinancing as even though a lower interest rate is generally available through home refinancing, this does not guarantee there will be a savings. There are other factors that determine whether refinancing is a beneficial option. The debt amount and length of the loan term also play a part.
Let us examine an example of a homeowner who has a debt which has a term length of five years with an interest rate marginally higher than that of a home loan. The homeowner obtains a refinancing mortgage which has a term life of thirty years. Because the homeowner will be paying the same debt amount over a much greater length of time, there will be no interest savings. There would be, however, reduced monthly payments.
This example brings us back to why it is important to decide the intention for debt consolidation refinancing. Interest savings or monthly payment reductions.
Will Your Financial Circumstances Improve with Refinancing?
It is important to look at the big picture when deciding whether refinancing is the appropriate option. If increased available cash is the object, long-term savings may not be a factor. The Internet has mortgage calculators that can be utilized to determine whether refinancing would result in realizing that objective. Consultation with a refinancing expert is also recommended to come to a definitive answer.
Making use of the information provided in this article will help the homeowner to make an educated decision.
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