Consolidating your debt can help you lower your monthly bills and
interest rates. While refinancing and home equity loans can both help you
pay off accounts, they have their own benefits. The best choice depends
on your current mortgage terms and future financial goals.
The Goal Of Debt Consolidation
The goal of debt consolidation is to pay off your current debt with a
new, lower rate loan. The lower your rates, the more of a savings your
pocketbook will see each month. But loan fees can eat into those
savings.
Extending your loan term can also lower your monthly payments. But your
interest costs will be higher over the life of the loan than if you
choose a shorter term.
For debt consolidation to be most affective, plan on paying off and
closing accounts as soon as your receive your loan amount. That way you
won’t be paying interest on two account or be tempted to use your credit.
Refinancing Your Mortgage For Debt Consolidation
Refinancing your mortgage to cash-out your equity for debt
consolidation purposes will qualify you for lower rates than a home equity loan.
Having one mortgage is seen as less risky by lenders than by having two
loans.
But you also have to consider overall rates. If you currently have a
low rate mortgage, then refinancing for a slightly higher rate doesn’t
make sense.
For example, if you have a $200,000 mortgage at 5% for 30 years, your
interest costs $186,513.24. Say you refinance for an additional $10.000,
but now your rate jumps to 6%. Your interest costs jumps to $231,677.04
– an increase over $45,000. It would have been better to go with a home
equity loan.
Using A Home Equity Loan
A home equity loan allows you to use your equity without affecting your
current mortgage rate. In some cases, it can also protect you from
having to provide private mortgage insurance, an additional cost.
However, home equity loans, also known as second mortgages, have higher
rates than if you refinance your mortgage. This is only an issue if you
have a high rate mortgage. In this case, the better choice is to
combine the cash-out with a refinance.
In the end, you need to compare numbers to find what is your best
option. Luckily, lenders offer free online quotes to make this easy.
View our recommended companies for
Debt Solutions.
