When Is Refinancing The Best Option For Dealing With Debt?

When Is Refinancing The Best Option For Dealing With Debt?

Refinancing your mortgage is one solution that is available for homeowners who are looking to consolidate debt. Refinancing means to replace an existing mortgage loan with a new one, which gives you the opportunity to agree upon new terms for the loan.

There are many reasons why you might choose to refinance your mortgage. It is possible to refinance for the same loan amount, obtaining new terms that benefit your situation. For example, you may want to extend the loan back out to 30 years in order to reduce your monthly repayments on your mortgage, or you may be able to secure lower interest rates, which has obvious benefits but must be weighed against the costs.

The other type of mortgage refinancing is known as cash-out refinancing, and can be used to consolidate your debts, or to release equity on your home.

When is refinancing the best option for dealing with debt - Toy house with keys

Cash-Out Refinancing For Debt Consolidation

Perhaps the best time to seek refinancing, is if you have an accumulation of debt, and are unable to make repayments. Whether it is your mortgage repayments that you are struggling with, or a combination of debt from multiple sources, mortgage refinancing can provide debt relief.

A simplified example can show how refinancing might be used to consolidate your debts. Let’s say that you have a mortgage of $80,000 on a $150,000 house, but you also owe $20,000 in credit cards and other loans. You are struggling to meet repayments on all of your existing debt. You decide to refinance your mortgage for $100,000.

This new $100,000 mortgage will replace your old mortgage, and the $20,000 cash-out can be used to pay off all of your other debts, effectively consolidating it all into one monthly repayment on your new mortgage.

It is crucial to remember that refinancing only consolidates your debts, and that you still have to make an effort to pay them off. You owe the same amount of money as before, but can relieve the pressure of the debt by obtaining new terms, and by making only a single monthly repayment on your new mortgage.

In short, you are consolidating all of your debt into one loan, your new mortgage, which is secured against your home.

When Is Refinancing For Consolidation A Good Idea?

Refinancing is a serious debt solution that should be considered carefully when used as a debt solution. There are some factors that you should consider when weighing up whether refinancing is an appropriate solution for your debts:

  • Are You Struggling With Debt?

If you are struggling with debt, especially if it is from multiple lenders, and are subsequently being charged late fees and taking hits to your credit rating, then debt consolidation might be an appropriate solution for you.

  • Have You Tried Other Solutions?

Depending on your financial situation, you may not need to refinance to solve your debt problems. Budgeting and financial management are the first call of action. You may also want to consider an unsecured consolidation loan if possible, so that your home is not at risk.

  • Are The New Terms Worth The Costs?

There are often costs associated with mortgage refinance, which typically work out at around 3-6%. To make up for these costs it is important that you secure a lower interest rate. This is very often possible with refinancing.

  • Will You Keep Up With Repayments?

Mortgage refinancing allows you the opportunity to define new terms for the loan, and to make just one monthly repayment to a single lender. This can give you instant relief from your debt when you consolidate, because you can wipe your troublesome repayment schedule and set a repayment agreement based on what you can afford to pay.

It is imperative, however, that you keep up with these repayments, as the refinanced mortgage is secured against your home.

The best time to refinance your mortgage then, is to consolidate your debts when you feeling the pressure from multiple sources, but only if you can secure favorable terms and a lower interest rate, and if you can keep up repayments on the new loan.

Debt Negotiators can help you to secure the best refinancing option for your mortgage, and negotiate terms that benefit your situation, and can help relieve you from the stress of debt. We offer a free consulation that can assess you situation, and see what debt solution may be appropriate for you.


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