After the recent financial cries, almost all homeowners in the U.S. are under the pressure of overwhelming debt. If you are also among them and are struggling hard to come out of it, then refinance your mortgage and consolidate your debt in order to wipe them off. Debt consolidation with refinancing is now a popular way to clear your debt as it allows you to get a new mortgage at a lower interest rate, and paying off some of the creditors. However, though it is a great way to pay off your outstanding debt but it has some negative as well as positive effects.
Let us first have a look at the positive effects.
When you refinance to consolidate your debt, you usually get a new loan at a lower interest rate. This helps you in different ways. If your existing debts like personal loans, vehicle loans or credit card debt have high interest rates, this lower interest mortgage loan will allow you to contribute more money towards principal and less to interest. This will relief you from handling multiple debts, as the mortgage payment will now cover all your debts you consolidated. A consolidation refinance will also lower your monthly payment by extending the term of your loan, allowing you to repay the debt over a long period of time.
Aside from the positive effects, you must also consider negative effects.
Consolidating debt through a refinance can be beneficial for you, provided you get a loan with a monthly payment that you can surely handle. However, your debt and the balance of your existing debt can be so large that it will result in an unaffordable payment. So act carefully when you decide to refinance, or else you can be stuck with large monthly payments that you will struggle to pay each month.
When you pay off your debt with a mortgage refinance consolidation, you are actually turning your unsecured debt into a secured one. You are also putting your home at risk if you being delinquent on making payments in time.
Mortgage consolidation loan can reduce the size of your monthly payment by extending the term of the loan that allows you to repay the debt over a longer period of time. This really cost you more in the long run, as you are going to pay in more interest over the years.
Another major negative effect of consolidating debt with refinance is that if in future the value of your home drops below the amount you owe, your options will get seriously restricted. Refinancing again will be a problem, and selling it will also be difficult for you. If a job change or any other activities require you to move, you definitely will not like to be in a home that is worth less than what you owe. So the more debt you tie up in your house, the greater the chance to be trapped in a home.
Hence, it is to be concluded that consolidating debt with refinancing can certainly be a great solution for you to improve your finances. But due to certain risks involved, you should go for it only after careful consideration. Make sure you bear in mind all the pros and cons while determining whether mortgage refinance consolidation is right for you.
