Debt Consolidation Information: What to Consider When Refinance to Consolidate Debt?

Written By: admin on January 5, 2009 No Comment

Whether you’re a homeowner in need for greater monthly cash flow, or you’re a homeowner who is drowning too deep under the heavy burden of credit card debts, you may want to consider refinancing to consolidate your debt. By consolidating your debts, you may consolidate higher interest debts such as credit card debts under a lower interest home loan. By the way, the interest rates associated with home loans are generally and considerably lower than those on credit cards. Some homeowners even opt to re-finance because it increases their monthly cash flow even if it does not result in an overall cost savings.

But, consolidating your loans can be rather tough. There are some factors that affect the equation. The difference in interest rates and the difference in loan terms and your current financial situation are some of them. Consolidating your debt may result in you paying more in the long run, or you having an improved financial situation by refinancing.

Before you, as a homeowner, re-finance your home loans, here are some things to read:

Debt Consolidation: the Definition

> to consolidate means to unite or to combine into one. That’s not the case in debt consolidation. The existing debts are really repaid by the debt consolidation loan.

When you re-finance your home for the purpose of debt consolidation, your individual debts are repaid by a new loan. As an example: before the debt consolidation, you have been repaying a monthly debt to three credit card companies, an auto lender, a student loan lender and one other lenders. After consolidating your debt, now you’re repaying only one debt to the mortgage lender who provided the debt consolidation loan. This new loan of yours will be subject to the applicable loan terms including interest rates and repayment period. Any terms associated with your individual loans are no longer valid as each of these loans has been repaid in full.

What Are Your Goals?

It is vital to determine your financial goals before doing any debt consolidation. Do you seek for lower monthly payments or an overall increase in savings as your financial goal? You have to choose your goal first, because debt consolidation could give you both, with its pluses and minuses. While debt consolidation can lead to lower monthly payments when a lower interest mortgage is obtained to repay higher interest debts, there is not always an overall cost savings. Why? Because aside from the interest rate, there are several factors that determine the amount of interest paid on your debt consolidation. They are: the amount of debt and the loan term, or length of the loan, figure prominently into the equation as well.

For example:

* You have debt A with a relatively small loan term of 5 years and an interest slightly higher than the rate associated with the debt consolidation loan. You have a debt consolidation loan and get a term of 30 years. So now you end up paying your debt over the course of 30 years at an interest rate slightly lower than the original rate. Although the monthly payments may be drastically reduced, you end up paying more in the long run. Again, reckon about your financial goal. Having a financial goal in mind will greatly help you choose what type of loan consolidation work best for you.

Alas, you should reckon whether refinancing for the purpose of debt consolidation will improve your financial situation.

What to do if I’m Clueless?

Dear, there are many mortgage calculators available on the Internet. Search for one that could be used to determine for example whether or not your monthly cash flow will increase. Otherwise, you could consult your financial situations and financial goals with industry experts in order to make a well informed choice. But, you should be careful in refinancing to consolidate your debt. For now, my advice will be to reduce your daily needs, don’t buy more than you can afford. It is your life and perhaps your family life’s future at the stake.