Debt Consolidation through Refinancing

Several house-owners may opt for refinancing to consolidate any existing debts that they may have. With such an option, house-owners can consolidate debts like credit card debts that are generally high interest with low interest home loans. Traditionally, interest rates for home loans are considerably lower than the interest rates related to credit cards.

 

Refinancing Consolidation Loans

 

Taking a decision on debt consolidation using a refinanced loan is often a tricky and complicated decision. Several complex factors have to be considered before taking such a decision, like the actual amount of existent debt, the different of interest rates available, difference in the terms of the loan, and the house-owner’s present financial situation.

 

This article is an endeavor to present this issue in a less complex form by providing function definitions for debt consolidation along with answers for to major questions that house-owners must be able to answer before they decide to refinance. The house-owner should know if he will end up paying a higher amount over the long term because of debt consolidation and if there will be an improvement in his financial situation through the refinance.

 

Definition of Debt Consolidation

The term of debt consolidation can confuse people because it is fundamentally a deceptive term. During a refinance for debt consolidation purposes, the house-owner does not consolidate his debt in the truest sense of the term used. By its definition, consolidation means the uniting or the combination of two things into one system.

 

However, when debt consolidation takes place, this is not the actual occurrence. Only the repayment of existing debts happens because of the consolidation loan. However, the total debt amount remains the same despite paying off individual debts with the new loan.

 

Before consolidating his debts, the house-owner may have had to pay monthly debt payments to one or several card companies, auto lenders, student loan lenders or many other lenders, but after consolidation, the house-owner makes a single repayment to the refinance lender who gave him the consolidation loan. This new loan has its own loan terms, such as interest rate and period for repayment. The terms for the previous individual loans are all void as those loans were wholly repaid using the new consolidation loan.

 

Do you end up paying a higher amount over the loan period?

When a house-owner considers a decision regarding debt consolidation, on of the most important things to figure out is whether the reason is lower monthly repayment or an increase in overall savings. It is an important thing to consider because debt consolidation using a low interest home loan may provide lower monthly payment options, but the overall cost may be higher.

 

This happens because interest rates aside, there are other factors that determine the total amount repaid. The actual debt amount and the period of repayment are prominent aspects in the equation.

 

For example, consider a debt that has a short repayment period of 5 years, with an interest rate very slightly higher that the interest rate of the debt consolidation mortgage. In such a case, if the repayment period of the debt consolidation mortgage is 30 years, then the original loan repayment would be extended over a period of 30 years, with the interest rate being only a little lower than the actual rate.

 

This way, the house-owner may have to pay more in the long run, but the advantage is that the amount of monthly repayment is significantly lower. Such decisions force the house-owner to consider which is more important to him – saving on the overall cost or having lower monthly payments.

 

Is refinancing going to present an improvement in your financial situation?

House-owners who think of consolidating their debts through refinancing should consider carefully if their financial situation will see an improvement with the refinance loan. It is important that they do so, because it will influence their decision if the refinance reduces monthly payments at the cost of overall savings. Several mortgage calculators are available online for the purpose of determining the increase or decrease in the monthly cash inflow.

 

By using such calculators, in addition to consultation with industry professionals, house-owners can take a good decision regarding refinancing.

 

Web resources:

Mortgage Refinance - Debt Consolidation Loan
http://www.imortgagecentral.com

 

Debt Consolidation Refinance - Pros and Cons
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