Your Question: Should I Refinance My Home to Consolidate My Debt?
Professor Tate Answers:
To consider this topic really well, it is important to look at the core thoughts that go behind debt consolidation. What does it do? When is it wise to do it, and what are the risks? Here are some questions that you should ponder about so you can better evaluate the refinancing of your home.
Debt consolidation is when you take on a new loan so you can pay off the others. Usually the older loans are the ones with higher interest rates and covers a shorter period of time. The older loans end up taking a huge chunk in your monthly fees that paying for them simply has become unmanageable. Through debt consolidation, the refinancing you get through the loan enables you to pay off the old debts and instead end up paying the new one, for lower interests and usually spread out for a longer period of time. As a result, you end up paying less monthly so you can manage your expenses better and budgeting on a monthly basis becomes manageable.
But there are things that you should take into careful consideration before taking on debt consolidation. Firstly, you need to have the financial discipline to not take on new debt of loans. Remember, the main reason why you took on a new loan is so you can get rid of the old ones with insane interest rates. If you take on a new loan and end up splurging again with your credit line then you are in big trouble. This is one important factor when you are considering refinancing your home. You can avail of the program so you can manage your monthly rates better, but make sure you have planned your finances so much so that you don't end up incurring more new debts on top of the refinancing responsibilities you need to cover.
One of the things to consider is if your interest rate will be lowered when you take the refinancing. It is advised that you take the refinancing if it will reduce your interest rate to 2%. Lowering your interest rate will not only enable to save more on a monthly basis, but it also helps you build more value for your property. This will help you build equity faster. You should also consider if you will shorten the term of the loan.
In some instances it also matters to look into the possible conversation from adjustable-rate to fixed-rate mortgages. Homeowners usually take the adjustable-rate because of the flexibility early on. But as interest rates constantly change, more and more people are opting for the fixed-rate for more stability even if they can be more expensive.
So after taking these into consideration, you can properly gauge if you should refinance your home. There are also available online mortgage calculators that help compute how much more monthly savings you will get if you refinance your home. It takes into consideration your current interest rate, current monthly payment, the remaining balance in your mortgage and the remaining years.
In the end, it's all about knowing your risks and deciding accordingly.
You asked, now you know!
-Professor Reel S. Tate