Taking on a debt of any kind and size needs proper research, care and concern so that you do not end up in a bowl of hot soup! You will need to exercise a lot of caution while refinancing your high interest debts with a low cost mortgage borrowing even if it seems like a no-brainer to you. This is because the basic principles and implications of debt. No matter whatever the case and your financial situations are, you must remember that you still have to pay off the debt.
You are legally bound to the creditor or the creditors if you have multiple loans, whether you take it out from any traditional lending sources such as a bank or any alternative online money lending sources such as Libertylending or any other for that matter. Your legal obligation will be as per the loan agreement that you signed while taking out the loan, and just like others, without going through the clauses of it precisely.
It is applicable to a debt consolidation loan as well.
- This specific type of loan is designed to make your repayments of multiple debts that you may be finding difficult currently into a more manageable and convenient process.
- It certainly does not eliminate your debt nor does it reduce the actual amount of debt that you owe to your creditor or creditors.
It simply reduces the number of your debts into one lower and longer repayment. It is a simple restructuring of your debt repayment plan.
In short, you must remember that you should not use your home equity unless and until you know that you can lead a very simple and disciplined and are very organized with your personal finance, debt management and household budget.
Get debt under control
It is not easy to get your debts under control. It will reach to unmanageable heights quickly even at the slightest lapses or overlooking of the smallest of facts. Ideally, debts acquired through financial mismanagement will never help you in the long run. It will only put you into further debt making it almost impossible to come out of it even after your best of efforts and highest support from the best credit advisors, debt management, and settlement or consolidation companies.
If you plan to use your home equity to consolidate debt, there are three ways in which you can do it:
- Considering a cash-out refinance
- Taking out a fixed rate second mortgage or
- Choose to take out a Home Equity Line Of Credit, HELOC.
All these three options have its own pros and cons and therefore you are advised to evaluate all these options before you make your final decision.
Do it right
However, considering debt consolidation mortgage currently is the best option to refinance your home so that you can pay off all of your other accounts. It will depend on the equity of your home to determine the amount you will get. This amount will help you to say goodbye to several of your loans such as:
- Your credit card balances
- Car loan outstanding and even
- Student debt.
However, you will have to make it right so that your monthly cost does not fall significantly. For this you will need to make sure that you do some checks first.
Verify the new rate of home equity nationwide by comparing and researching the Federal Reserve reports. According to this report published it is found that:
- Homeowners typically accumulated real estate equity that is worth $13.9 trillion. This is a lot more than it was used to be. This is because home values have been increasing in most of the areas.
- According to another research by the National Association of Realtors it was found that the home prices existing all over the nation has risen for the 68th straight month considering the gains year over year.
In addition to that, you must consider the advantage of debt consolidation mortgage. A closer look at it will show that:
- The homeowners have generally gained a large amount of equity
- They now also have an increased access to that money.
This is because the mortgage rates of today are around 4%, which is a rate that is found to be much lower than the cost of financing a car or availing a student and especially credit cards financing.
Next up, you should consider the factors that will influence your choice between home equity loan or cash-out refinance. When you do so you will really be surprised at your findings. This is because when you repay a mortgage at 4% and on the other hand a credit card at 16%, the difference in the rate is pretty obvious.
Lastly, you must consider the pitfalls of it. Ideally, the lower rate should not be your only consideration as that is not the only thing that you want. The following examples will make things clear to you:
- If you carry a debt of $1,000 and think to repay it over five years at 16%, the total amount of interest will be $459.20 indicating a monthly payment of $24.32.
- Alternatively, if you have the same amount of debt paid at 4% over a period of 30 years, the monthly payment will come down to as low as just $4.77. However, if you consider the total interest cost over these 30 years, it will come up to $717.20.
See the difference? That is why it is necessary that you are careful out there. Your ultimate aim should not only center on looking for a lower rate but also for a loan that will be specifically structured to your advantage.
In addition to that you must also consider the elephant that is still in the room: you still owe the money to your creditors. Typically, refinancing the non-housing debts with a mortgage does not necessarily mean your debts are eliminated and have been wiped out. It still exists. The real goal for you will be to be debt free with proper restructuring of the debts to make it more manageable.