Mortgage Refinance - Is It Right For You?
by: WilliamBlake |
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There are many possible benefits to refinancing your home. If you have earned equity in your home a refinance can allow you to draw on some of that equity to make improvements on your home or possible pay off some credit cards. Also, low interest rates make a refinance tempting because it will result in lower monthly payments and decrease the overall interest paid on the loan.
If a mortgage refinance is being considered to consolidate existing debt, there are a few negatives that should be taken into consideration.
One drawback is what was just alluded to: it's a big step. Refinancing your current mortgage loan involves most of the steps required to take out the loan in the first place. You'll need current income statements, past tax filings and an array of other documentation. You'll (usually) be filling out a lot of paperwork, and sometimes paying additional fees.
It is wise to calculate the cost before deciding what you want to do. It takes a lot of time and money to refinance. Online calculators are easily accessible and can be a very useful tool.
One reason some consider making the effort, though, is almost always a poor one: to pay off credit card and other high interest debt. There are many ways to offload that debt without going through the pain of refinancing your primary mortgage loan.
If you have reasonable credit and some equity, you can get a second mortgage or a homeowner's equity line of credit (HELOC). The rate may be slightly higher, but you will find the effort is considerably less. It also protects you in case of financial reverses. Provided you continue to make the primary payments, if you slide for a while on the secondary you are unlikely to be at risk of losing your home.
The second reason is more fundamental. Rather than continuing to seek a way out of debt by borrowing yet more money, you should first make serious efforts to reduce your dependence on borrowing. Some readjustment of current debt may be a good plan - if you can achieve a lower total outstanding debt, a lower interest rate or negotiate relief from some of the payments.
By making a new loan to try to solve the problem you dig yourself that much deeper into debt. It may be necessary but should be the last option you consider, not your first choice.
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About the Author
Is secured debt consolidation a good choice for getting your debt paid off? Learn more about how it works and whether or not it's a good choice at the Debt Smackdown website.
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