Posts Tagged ‘refinance’
Should you refinance your mortgage to get out of debt?
Finally, got deep in debt and looking for debt relief – right? By now you must admit that getting into debt is easier and getting out of it is toughest activity. Am I right or not? Don’t be depressed, it may be hard but not impossible. Reading different stories about people who incurred debt and their hardship will be disheartening but one should realize that there are many options to get relief from debt.
Have you heard about debt consolidation loan? It is one such option for debt relief. It works by consolidating all your small debt into one like credit card debt, medical bills, personal loan etc. allowing you to make only one payment per month can seem very attractive option particularly when you get a loan at lower interest rate. Under such circumstances, one question that everyone gets is whether I will be able to get lower interest rate loan?
In reality, the rate of interest charged on credit will lot depend on the type of credit, unsecured or secured? Secured debt is one that lenders require collateral to lend you money. The collateral can be any valuable thing. The amount of money that the lender lends will depend on the value of the collateral you have secured. With secured loan, it you were to default on debt, and then lender will liquidate underlying collateral to recover his money back. As the lender has the guarantee for the amount he lends in the form of collateral, the risk of lending is little therefore this advantage is transfer to borrower in the form of lower interest rate. For example, mortgage.
On the other hand, with unsecured debt, the lender has to risk for the amount he lends to borrower as there is no guarantee for the amount you borrow from lender. Due to associated risk, the rate of interest charged on the unsecured debt will be more. For example, credit card debt.
In these aspects, there are many lines of credit through which debt can be consolidated. If you have home, then it can be used to consolidate your debt by taking home equity loan or refinancing to cash out to pay off other debts. The other way includes unsecured personal which has become very expensive and difficult to achieve in current market conditions.
In such scenario, if you have equity on your home then it can make lot of sense to consolidate other forms of debt. for example: if you have $20,000 on unsecured debt like credit card debt, personal loans that carries 20 percent interest then it will be wise to roll the debt with mortgage that carries 5 to 6 percent rate of interest. With this move you stop your debt to incur at faster pace.
But as with any other issues it also has downside. For this reason many experts go against using mortgage as a debt consolidation option. Although you simplify your finance with mortgage debt consolidation, it can lead to many other serious troubles if you don’t manage to handle payments on time in future.