When you have some high-interest debt and at the same time have home equity, a mortgage refinancing and a consolidated debt could tempt you. Then, should you go for it and if yes, what are the pros and cons? Yes, you need to decide and make an informed decision. It is true that debts trouble your mind and affects your budget. In such a financial turmoil, consolidation of your high-interest loans into a low-interest debt could be your best bet provided you know the rules of the game.
According to an article published on https://www.huffpost.com, you should consider a few things before choosing debt consolidation. For example, if you are consolidating the wrong debts, it will not help you much. Your gut feeling is to opt for a high-value loan but that can affect your finances adversely over the years. You should take a close look at the rates of interest associated with each debt. These little things matter a lot when refinancing a mortgage with a consolidated loan.
You must also read the loan agreement carefully to determine whether there are any hidden charges or not. Some lenders also ask for origination fees. Read in to learn how refinancing your home loan is a smart way to debt consolidation.
The Number Of Debts You Have
Let us suppose that you have a total debt of $45,000 as credit card debt, personal loan, car loans, and things like that. The rate of interest is very high for these loans. You’re paying $1,200 monthly interest and not making much progress when it comes to repaying the original amount borrowed.
Again, you bought property for $120,000 a decade ago and you need to repay the mortgage for 30 years, which now amounts to $175,000. You made a down payment of 20 percent when you bought the house, and today you still need to repay $75,000. Now, your home equity is about $130,000. And this sum of money will help you pay all your debts.
The problem is whether to refinance your home with a mortgage to repay this debt. Will you refinance the entire amount into a reduced rate of interest, thus minimizing your monthly payment? Let us discuss the best financial path to choose.
Look At The Interest Rates On Your Existing Debts
When it comes to the rate of interest on debts, it varies significantly. The major drivers are credit score and whether your loan is secured or an unsecured one. Secured debts usually have collateral attached to them and carry a lower rate of interest than unsecured loans.
Usually, car loans and mortgages have interest rates less than seven percent and two percent and four percent respectively. Again, an unsecured personal loan from credit cards or a commercial bank may have an interest rate of 25 percent to 30 percent. The rule of thumb is low the credit score, higher is the interest rate for you.
In the $45,000 example mentioned before, $22,500 spread over two credit cards with an interest of 20 percent. You can learn more about debt consolidation hacks for home finance, on websites like NationaldebtRelief.com or similar ones.
Which Loan Must You Refinance?
Taking a consolidated loan that you cannot repay or lose employment after taking the loan will put in a great financial mess. You could even lose your property if you declare bankruptcy due to undue personal debt. We recommend avoiding refinancing debt that could be used in bankruptcy into a mortgage you do not have the ability to repay. Make sure your housing costs are not more than 30 percent of your overall earnings after paying tax. Let us explain this point with the help of an example. If you have a monthly income of $3,000 per month post-tax payment, avoid a mortgage that is over $1,000 per month. Opt for a mortgage payment of a lesser amount depending on your expenses.
Refinancing out of your credit card debt, which is $22,500 at 20 rates of interest is a no-brainer. What is it about student debt? School loans carry an interest rate of approx. three percent above a standard mortgage. If you want to delay or postpone a student debt because of financial issues, it is easy to do than shelling out money for mortgage.
Therefore, it is better to refinance some student loan into a mortgage so that the student debt does not require you to pay for 20-30 year. Keep a comparatively low student loan post refinancing, less than $15,000 that could be repaid with additional payments within a couple of years. The moral of the story is prioritizing high-interest debt.
Mortgage To Refinance
30 or 15-year mortgage: Usually, a 15-year mortgage will carry interest rates of about one percent less than 30-year mortgages. A short repayment term also minimizes the risks of the lender. Then, when the time or tenure of the loan is compressed or shortened, the total payment will be on the higher side. You can opt for a 15-year mortgage provided you have the financial ability to repay the amount on time and the money you need to shell out is not tied up for some other payments. Besides, you possibly would not be employed at the close of the 30-year mortgage term. These little things matter when deciding which debt to refinance.
Fixed or adjustable-rate mortgages: The adjustable rates change once in a year by a specific sum attached to a fixed index rate. It has a low rate of interest initially than a fixed-rate mortgage. However, it has some higher risk factors. It is your best options if the interest rate is historically low and possibly to increase. On the contrary, a fixed-rate mortgage is around 3.5-3.75 percent and better than the adjustable rate, as rates of interest are low.
Refinance your mortgage with a consolidation loan depending on your financial ability to repay the borrowed amount. Weigh the options, pros, and cons before making a decision. Take some time and think before you sign on the dotted line.