There are many reasons why you should consider refinancing your mortgage. When the rates are low, it is possible to lower your monthly payment and/or the total amount of interest that you will have to pay over the lifetime of the loan. Another reason for refinancing your mortgage is so that you can take out some equity in order to be able to refinance home improvement projects or to pay off some of your other loans.
However, you should know that refinancing your mortgage as a way of adjusting debt has some drawbacks that you really need to consider before taking this big step. In fact, it requires most of the same steps that you had to go through in order to take out the loan in the first place. Besides time, you will also need to have a substantial amount of money before the end of your loan’s term.
Before you go through this process, you are going to want to be sure that you run some realistic calculations. There are online calculators available to help you with this process. You are also going to need to have current income statements, past tax filings and a lot of other documentation. Lots of paperwork will need to be filled out and sometimes there will also be additional fees that need paid.
One of the many reasons why many people want to make the effort to do this is a bad one: they want to pay off high interest debt (i.e. credit card debt). There are a lot of better ways in which you can get rid of this type of debt without going through the pain of refinancing your mortgage. For instance, if you have decent credit and some equity, then you can get either a second mortgage or a HELOC (homeowner’s equity line of credit). While the rate might be slightly higher, it does take a lot less effort to get these types of loans. You will also be protected in case of financial reverses in that you will not risk losing your home.
Another reason why people go to the effort of refinancing their mortgage is because they want to readjust their current debt. This can be a good plan if you are able to achieve a lower total outstanding debt, a lower interest rate or if you can negotiate relief from some of the other payments. However, when you borrow more money, you only add to your long-term problem. Thus, this really should be a last resort, not the first thing that you think of to get out of your problem.
Debt consolidation merely reshuffles your debt because you add to your debt more interest that you have to pay, thus making your situation worse. Thus, you really need to make sure that this is a good plan for you. It needs to have a payment plan that gradually reduces your burden while allowing you to meet your obligations.
Really, the only way that you can be sure that you are doing the right thing is to objectively examine all of your outstanding obligations and research the different plans that are available. The ideal way to manage your debt is by combining debt forgiveness with lowered monthly payments and reduced interest payments.
You do not have to surrender your home in order to handle a short-term problem. There are other ways of fixing it.