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Should I refinance my house to consolidate debts?
My credit score is low and a lot of credit cards are pending. Should I refinance my home to consolidate the debts?
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1 Reply
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Refinancing the home to consolidate debt might be a good move, but there are some things you need to think about first. Here’s what:
Pros of Refinancing for Debt Consolidation
Lower Interest Rates: Credit card interest rates are higher than mortgage rates. Instead of paying off high-interest debt with a lower-interest mortgage, you can save money on interest over time.
Single Monthly Payment: Consolidating your debts under one mortgage payment makes it easier to manage because it reduces the number of bills due every month.
Potential for Lower Monthly Payments: Monthly payments could be lower than combined payments on existing debts depending on the refinance terms.
Cons and Considerations
Risk of Losing Your Home: If you secure credit card debt (unsecured) with your house (secured), being unable to pay the mortgage means losing ownership through foreclosure.
Closing Costs and Fees:
Refinancing typically involves substantial closing costs, which may outweigh some benefits if you plan to leave your residence soon after refinancing.
Longer Repayment Period:
Although monthly payments can decrease through refinancing, this also increases how long one stays in debt, which can result in more lifetime interest paid.
Credit Score Impact:
Refinancing is difficult when your credit score is already low since the best interest rates may be beyond reach. Moreover, pending approval for new credit cards will further lower your credit score.
Discipline and Spending Habits:
If only additional credit card debts continue to be accumulated but incorporated into one’s mortgage, then one may end up worse off financially than before. Therefore, underlying spending habits responsible for causing indebtedness must be addressed adequately.
Alternatives to Consider
Debt Management Plan: A debt management plan developed in collaboration with any of the various available credit counseling agencies might help clear away those outstanding balances owed without necessarily requiring someone to undergo refinance procedures.
Personal Loan:
Getting personal loans at lower interest rates than what credit cards normally charge could serve as another alternative for people who want their debts consolidated but not through the use of homes.
Balance Transfer Credit Card:
If eligible, a balance transfer credit card with a low or 0% introductory rate might enable someone to pay down his/her debt more affordably.
Negotiate with Creditors:
Trying to negotiate lower payment plans or even reduced APRs from individual lenders to whom you owe money can still work out fine, especially if done well.
Refinancing your home to consolidate debt is only worthwhile when a person secures low interest rates and has no intentions of taking up new credits. However, it is important to remember that the risks involved are also considerable, such as losing ownership over failure to make timely mortgage repayments. Hence, consider talking with a financial adviser or mortgage expert so that they can guide you based on your current economic status towards making sound decisions about how best this should be approached.