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.
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