When to Refinance Your Home Loan for Debt Consolidation


September 28, 2017

refinance-home-loan-debt-consolidation

If you are overwhelmed by your credit cards, personal loans, and other debts, you should look into refinancing your home loan so you can consolidate. No one plans to build up a sizable credit card balance or end up with more loan repayments than they can keep track of. But, the reality is, life is unpredictable. And, unpredictable can become expensive.

Unless you have a solid emergency fund in place to cover job loss, unplanned relocation, and braces for the kids, you’ll have to get personal financing to cover your expenses. The more debt you have, the harder it is to get out of.

Many Australians use a debt consolidation loan to help reduce their debt load and save money. When you refinance, you can roll all of your debts into one, manageable payment. Plus, you’ll get to use your home loan interest rate, which is likely significantly lower than your credit card rates. Are you in a good position to refinance so you can consolidate debt?

How Does a Debt Consolidation Loan Work?

Often the driving force behind debt consolidation is to lower your repayment amount. When you refinance, your repayments will decrease with your lower home loan rate and a longer term.

For example, if you started with a 30-year loan and you’ve been paying down your mortgage for three or four years, and then refinance to a new, 30-year home loan, your mortgage repayments will decrease. If you wanted to include $25,000 of your other debts into your new loan, you could refinance to cover this amount as well, slightly increasing the repayments on a new 30-year loan. The result? Lower monthly mortgage repayments and you’ll only have to make one repayment each month, simplifying your finances.

What Are the Benefits?

With a new loan and one repayment amount, you’ll finally have your debt under control. You’ll have a repayment amount that fits within your budget and can save money with a lowered interest rate. A debt consolidation loan will also protect you from missing payments or even declaring bankruptcy if you had previously reached a point where you couldn’t manage your debt.

This means less stress. Having manageable payments can take a huge weight off your shoulders. Also, you’ll have extra cash to save – you can even build up a better emergency fund so you’ll be better prepared to deal with a car repair, medical bill or other unexpected expenses in the future.

How Do You Know a New Loan Is Right for You?

Refinancing does come with some risks. You’ll have to pay refinancing fees in order to switch to a new loan. If your credit isn’t as good as it was, you may not be able to refinance to a competitive rate, which means you won’t save as much money as you had hoped by consolidating. You should rethink refinancing if you have to borrow more than 80% of your home’s value. Borrowing over 80% will mean you’ll have to pay lender’s mortgage insurance.

To assess if this option is right for you, sit down and talk with a mortgage specialist or other financial professional. You need to examine how much you’ll save when you consolidate and make sure it is more than the amount you’ll pay in refinancing fees. Also, keep in mind when you refinance to a longer term, you’ll increase the overall interest you’ll pay. Debt consolidation can make your life a lot easier. Just make sure you work out the costs and benefits to decide if it is worth it for your unique circumstances.


Written by Refinancing.com.au

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