A number of unsecured loans such as high credit card debts balances may put you into financial stress. In such situations, you may want to reduce the load as much as possible and as quickly as you can. The longer you linger and carry on with your debt you will have to pay unnecessary interest even more. Since credit card balances attracts highest rates of interest amongst all in the financial industry, you will be much more in trouble.
However, to put this nice theoretical idea into practice may not be as easy and nice it sounds. It is not easy to find the finance required for it. The best way is to consolidate your debts. This process becomes much easier if you are a homeowner. You will be able to reduce your balances or at least the interest rates you are paying on these if you utilize the equity of your home.
You can do this in different methods such as refinancing the existing mortgage, taking out a home equity loan or cash-out refinancing. However, every one of these has its significant pros and cons that you should know and consider to choose the right option and to make it work perfectly for you. It is recommended that you read the debt consolidation reviews to be more informed and take an educated decision in the end.
Refinancing existing mortgage
If you refinance your existing mortgage you will find that it is the best way to free up your cash. Moreover, the mortgage interest rates being at an all-time low now, it is most feasible to refinance your existing mortgage at a lower rate of interest. It will significantly reduce your monthly repayment obligations. In the process, you will save a lot of money which you can set aside for any emergency situations after paying off your debts.
However it has both advantages and disadvantages. The list of advantages includes:
- A reduced rate of interest that will save a lot of money through the life of the loan and therefore free up useful cash
- It will further reduce your monthly payments by extending the length of the term for repayment.
As for the downsides of refinancing existing mortgage, it will cost you money in different forms such as closing costs, appraisals, surveys and points and origination fees. Apart from that, you may end up paying more as you will spend extra years due to the extended repayment time.
Another popular strategy to pay off your multiple unmanageable debts is to take out a new and larger mortgage altogether. This will not only help you to pay the old mortgage but at the same time will leave you with enough additional cash at the closing after you pay off the other bills.
- This option is called the cash-out refinance and to avail this loan you will need to have adequate equity in the property which is calculated by finding the difference between how much you actually owe and the market value of your property.
- When the refinancing process is completed, you will owe money only to your primary mortgage lender and not to a number of credit card companies and third party lenders. By consolidating your debts you are actually cutting the number of bills and creditors you have by pulling equity from your property.
- Apart from simplifying your monthly payments this method has another significant benefit to provide: savings. For example, if you are paying 15% interest on your credit card debt as per the national average that is fixed at 14.83 and do a home-equity refinancing for less than 5% since the average rate is 4.5% for a 30 year mortgage loans, you will save a lot of money in interest immediately when you roll your credit card debts into a mortgage loan.
However, cash-out refinancing also has its downfall and the most major one is that you compromise your home equity by binding it with your unsecured debts. This has a high risk of having your home valued much less than what you actually owe to the bank and may go ‘underwater’ easily. In such a situation you can face foreclosure in case you fall behind on your new mortgage.
Home equity loans
Apart from the two options, you may also take on a home equity loan as an additional strategy to reduce your debts. This is also known as a second mortgage and you can only avail it when you have enough equity in your property. The important feature of home equity loan is that you can use it as collateral for your loan to secure another loan at a fixed rate and pay your other debts.
A home equity loan is much similar to a Home Equity Line of Credit commonly known as HELOC with the only difference that a HELOC is a line of revolving credit. It is usually offered with an adjustable rate of interest instead of a fixed one. This is an open ended credit that any borrower may decide when to use this.
The benefits of taking on such a loan include:
- You can enjoy tax benefits and
- The rate of interest rate is typically much lower than any unsecured or credit card loan
On the other hand, a home equity loan will usually create a lien against your property. This may in turn reduce your home equity. Moreover, if you fail to make the payments, you are at a risk of defaulting which might lead to losing your home or foreclosure.
Take proper action
If you think that any of these there options mentioned above is right for you, you must now prepare yourself to apply. Here are a few steps to take:
- Make sure that you review your credit situation before you apply so that it meets the requirements of the lender
- Get a preliminary idea of the value of your home from an appraiser and
- Shop around to find a suitable bank.
Having complete information about the process before you go ahead will help you to make the loan work best for you.