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Refinancing & Consolidating Your Debt

If your debts have stacked up to the point where you feel like you're drowning, you might be looking for ways to make life a little simpler. One avenue to consider is refinancing your mortgage. A carefully thought out and executed refinance can save you hundreds, if not thousands, of dollars, and can indeed make life simpler, by consolidating many unsecured debts into one lower, secured monthly loan payment.

A carefully thought out and executed refinance can save you hundreds, if not thousands


Sound good? Here is a breakdown of the advantages and disadvantages of refinancing your mortgage in order to consolidate your other debts.

The possible advantages of a refinance

You can usually acquire a lower interest rate than what you are paying on your current debts, especially if these are credit card debts.

Another advantage is the possibility of switching from an adjustable interest rate to a lower fixed interest rate.

Something else to consider is eliminating the chore of keeping track of all those monthly payments by combining them into a single simpler monthly payment.

Applying for a debt consolidation refinance loan should not harm your credit report or your credit score because even though you are taking out another loan, you will also be paying off some or all outstanding debts, and if you pay your remaining refinance loan faithfully, your credit should actually improve.

A debt consolidation refinance loan is still a mortgage loan, and thus is eligible for tax deductions. This is something no credit card debt or high interest auto loan offers.

Because you will acquire a lower interest rate on your refinance loan, you will end up paying less every month than you are right now with all those outstanding debts, plus you will pay off your debt sooner.

You could conceivably take the cash difference every month (the money you are saving with your lower interest refinance loan) and put it in an IRA for your retirement, towards your children's college educations or into an emergency fund.

Possible disadvantages to a debt consolidation refinance loan

You are putting your home up as collateral on this loan. If you do not make your monthly refinance loan payments, the lender can take your home away from you and sell it in order to recoup financial losses.

If you do not research beforehand, and immediately choose to go with either your present lender or whoever offers the lowest interest rate, you could get stuck paying high refinancing fees that may result in it taking years for you to break even.

Good advice when considering a debt consolidation refinance loan

Don't assume there will be no fees attached to your refinance loan. Ask about fees, and budget for them. Insist that every lender you are considering provide you with a written list of fees that you will be charged. These might include but are not limited to discount points, appraisal costs, application fees and closing costs.

Perform careful research before you make any decisions. You should compare interest rates, lenders, terms, fees and all the various refinancing opportunities available.

Is your income secure and steady? If so, it will help alleviate any fear you may feel about repaying the loan and will also help you get a lower interest rate.

Is your credit score as high as it can be? Get copies of your credit reports from the three major credit reporting agencies, and read them over carefully for errors. Removing mistakes from your report before you apply for a debt consolidation loan will save you money and reward you with a better deal. It is not uncommon to discover both major and minor errors on credit reports. Also check for identity theft, which is becoming more and more common and can wreak havoc on an innocent person's credit. If your report shows mistakes and/or questionable listings, consider hiring a reputable credit repair company to assist you in cleaning your credit report and thereby raising your credit scores.

It would be wise to develop an emergency plan that you could put into effect if you were to lose your job or become disabled. Such events might be remote, but it is always wise to be prepared. Can you contribute to a savings account, or do you have any other assets that could be used in an emergency?

Only consider a mortgage refinancing loan for good reasons, such as debt consolidation, which most experts consider a wise move to make. Another good idea is to utilize a mortgage refinancing loan to pay for higher education costs or to make reasonable home improvements that will increase your home's resale value. It is not recommended to refinance your home for things like taking a vacation or buying an expensive boat or car.

Learning how to budget your money and increase your wealth is a good idea for all of us. If you have found yourself drowning in such debt that you must consider a debt consolidation loan, is it because of some unforeseen and unavoidable event, or is it simply that you are spending more than your income can handle?

There are many resources, books, articles, magazines, the Internet and educational courses, for example, that will help you learn how to live within your means.

Calculate all the fees associated with the loan you are being offered. Make sure there is no penalty for early repayment. Are there any hidden fees? Do the math to make sure this refinance loan will indeed save you money.

How long do you intend to remain in the home that you are taking out a refinancing loan on, and how long will it take you to break even from paying the fees and closing costs?

Will you go short-term or long-term on your refinance? A short-term refinance could equal even lower interest rates, but you have to be able to afford the higher monthly payments.

Another thing to consider is the interest rate. Will it be fixed or variable? Adjustable rate loans can sometimes be lower at the beginning but can take upward sweeps unexpectedly after time. Will you still be able to afford the monthly payment if it goes up?

See if your current lender will meet or beat other lenders' offers.

Finally, get everything in writing and read all the fine print.

Final things to consider

You should only consider debt consolidation through refinancing if the long-term savings outweigh the initial output. Divide the cost of the refinance by your monthly savings. The sum you come up with is the number of months you need to remain in your current home in order to make this loan worthwhile.

A debt consolidation refinance loan is a big financial commitment and must be carefully considered. If it makes sense and will save you a substantial amount of money, this is a wise choice. Plus, a consolidation refinance loan can also, in the long run, improve your credit. For a quote on a consolidation refinance loan, we suggest our home loan center.

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