Refinancing or Debt
Consolidation? Which is Right for You?
If you ever find yourself struggling to pay off seven or eight
credit card bills, you may consider turning to debt consolidation or
refinancing. But what exactly is debt consolidation and refinancing,
and which is the right option for you? Read on to learn more about
these two options and to determine which one would best serve your
needs.
What is debt consolidation?
Debt consolidation, sometimes called a consolidation loan, is the
process of combining multiple loans or debts into a single,
convenient payment. Many consumers who are having a hard time paying
monthly loan or credit card payments and have used up deferment
options turn to debt consolidation to avoid going into default.
One way to consolidate debt is through a home equity loan or line of
credit, which allows you to turn your home equity into cash you can
use to pay off debts. However, this requires that you use your home
as collateral, which can be risky.
What are the benefits of debt consolidation?
Debt consolidation offers incredible convenience. Because you only
have to pay one creditor as opposed to eight or nine, this
translates into less work for you, fewer checks, fewer stamps and
only one payment to remember each month.
Additionally, if the interest rate on your consolidation loan is
lower than that of your current loans and credit cards, you’ll have
a lower monthly payment. Another bonus is that debt consolidation
sometimes offers tax benefits. If you decide to go with a
consolidated loan, check with a tax expert to see if the interest on
your loan is tax deductible.
Is debt consolidation right for you?
If you’re having a hard time meeting monthly loan or credit card
payments and the interest rate on a consolidation loan is lower than
the rate on your current loans, then debt consolidation may be a
good option.
However, you should also consider the number of years you’ll be
paying off the consolidation loan. Although the monthly payment for
a debt consolidation loan may be lower than what you pay on your
current loan, it may take you more years to pay off the
consolidation loan—which translates into a higher grand total.
For example, your current loans may all be due within 10 years, but
the consolidated loan may be due in 15 years. Multiply the monthly
payment by 15 years instead of 10, and see how the total compares.
Before taking a consolidation loan, you should also consider the
number of payments you have remaining on your loan. It is probably
not worth consolidating loans with only a handful of payments left.
What is refinancing?
Refinancing is the process of paying off your current mortgage and
replacing it with a new one.
Refinancing benefits:
When interest rates are low, refinancing offers incredible benefits
to homeowners looking to save money. If you take a new mortgage loan
with lower interest rates, your monthly payments will be lower,
allowing you to consolidate or pay off all your other loans at once.
Plus, you can use the savings you realize from refinancing however
you like. You may choose to use the extra funds to buy a car, save
up for your child’s college tuition or make home improvements.
When is refinancing the best option?
If you are struggling to pay multiple bills and the interest rate on
your current mortgage is 1.5 to 2% higher than what is currently
available, then it is probably worth your while to refinance your
current mortgage.
Of course, in order to refinance, you must be able to come up with
the up-front refinancing costs, have some equity in your home and
have a steady income. Therefore, if you plan on selling your house
in a couple of years, refinancing is probably not worth the expense,
since you won't have a chance to recover the costs.
Free yourself from debt today. If you’re struggling to pay off
multiple loans or credit card bills, take a look at the countless
consolidation loans and refinancing options available to you.
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