A few homeowners opt to refinance to consolidate their existing debts. With this sort of option, the homeowner may consolidate higher interest debts like charge card debts under a lower interest home loan.
The interest rates affiliated with home loans are traditionally lower than the rates affiliated with charge cards by a considerable amount. Deciding whether or not to re-finance for the purpose of debt consolidation may be a kind of tricky issue.
There are a number of complex elements which enter into the equation including the total of existing debt, the difference in interest rates as well as the difference in loan terms and the present financial state of the homeowner.
The term debt consolidation may be fairly confusing as the term itself is fairly deceptive. When a homeowner re-finances his home for the purpose of debt consolidation, he is not really consolidating the debt in the true sense of the word.
By definition to consolidate means to combine or to merge into one system. But, this isn’t what really occurs when debts are consolidated. The existing debts are really repaid by the debt consolidation loan. Although the total sum of debt stays constant, the individual debts are repaid by the new loan.
Before the debt consolidation the homeowner might have been repaying a monthly debt to one or more charge card companies, a car lender, a student loan lender or any number of additional lenders but now the homeowner is repaying one debt to the mortgage lender who supplied the debt consolidation loan.
This fresh loan will be subject to the applicable loan terms including rates of interest and repayment period. Any terms affiliated with the individual loans are no longer valid, as each of these loans has been paid back in full.
When thinking about debt consolidation it’s crucial to determine whether lower monthly payments or an overall increase in savings is being sought.
This is a crucial consideration as while debt consolidation may lead to lower monthly payments if a lower interest mortgage is obtained to repay higher interest debts there is not always a total cost savings.
This is because interest rate alone doesn’t determine the amount which will be paid in interest. The total of debt and the loan term, or length of the loan, figure prominently into the equation too. As an illustration, consider a debt with a comparatively short loan term of 5 years and an interest only somewhat higher than the rate associated with the debt consolidation loan.
In that case, if the term of the debt consolidation loan were 30 years the repayment of the original loan would be extended over the course of 30 years at a rate of interest which is only somewhat lower than the original rate.
In that case, it’s clear the homeowner could end up paying more in the long run. But, the monthly payments will likely be drastically reduced. This sort of decision forces the homeowner to decide whether a total savings or lower monthly payments is more crucial.
Homeowners who are thinking about re-financing for the purpose of debt consolidation ought to carefully consider whether or not their financial situation will be bettered by re-financing. This is crucial as some homeowners might opt to re-finance as it increases their monthly cash flow even if it doesn’t result in a total cost savings.
There are a lot of mortgage calculators available on the Net which may be used for purposes like determining whether or not monthly cash flow will increase. Utilizing these calculators and consulting with industry experts will help the homeowner to make an intelligent decision.