Refinancing your debts is the best way that you can consolidate both your secure and unsecured loans. If you are burdened with mortgage, credit card, medical bills, utility dues and other types of debt, this is something that you can consider. You refinance your mortgage – meaning, you put your home on the line so you can adapt a lower interest rate, longer payment term and possibly have extra to pay off your other debts.
While that may seem appealing, you need to understand what refinancing is all about before you choose it as your debt solution. Like other debt relief programs, this can work perfectly for some while it can lead to disaster for other financial situations.
First of all, you have to understand why you are refinancing your mortgage. If you want a solution that will actively take on your debt payments, then this is not your solution. This only restructures your debt and does not really pay it off.
Most of the time, your goal in refinancing should be to consolidate your debts to allow you to make better progress in your payments. The single payment scheme will allow you to put in less effort in monitoring your debt and more into growing your income.
Another goal of refinancing is to get a lower interest rate. This happens because it extends your payment term to 15 or 30 years. If you do not like a term that long, then refinancing is not for you as well. Debt consolidation loans may prove to be the better option as it usually takes only 5 years. But even if the term is very long in refinancing, you can really benefit from the low interest.
This type of debt solution will allow you to make lower monthly payments and the low interest may be appealing for those who want to solve high interest credit card debt. But remember, you could end up paying more in interest. You are only relieving yourself of high monthly payments but if you total it, you actually increased your overall debt payment.
The key to making this successful is to do it only once. Believe it or not, people sometimes refinance several times. This happens because they do not have the discipline to correct past mistakes. The single payment can be deceiving in the sense that it gives consumers the false sense of security and thus prompts them to reuse the credit cards that were paid off by the refinancing. This puts them in a tight spot once more and prompts them to do another refinancing. It becomes a cycle that you need to be careful of. Do it once and make sure you learn your lesson so you never incur more debt.
Refinancing a mortgage will entail costs and you have to think about that. You need to pay off closing costs for you to complete your refinancing. Before the lender approves of the loan, they need to have the home appraised and that involves costs that you will shoulder.
Bottom line is this – make sure you are going through refinancing with the right intentions and with a clear and solid plan to pay it off. Check out your old loan and see if there are prepayment penalties. Do all the appropriate calculations to make sure that it will do you well financially to go for this type of debt relief option. See if it will help you achieve your financial goals – not just making your life easier in terms of debt payments.