Mortgage Refinancing
One way of consolidating your outstanding debts is through mortgage refinancing. If you have a number of separate outstanding debts, some of which are at high interest, then it may well be cost effective for you to use the equity in your home as security to consolidate the credit card and other loans into one monthly payment.
A secured loan or second mortgage is often used for debt consolidation, but there is no reason why you should not at least compare that option with total mortgage refinancing. In fact, even if you do not have any outstanding debts other than a mortgage, you could find mortgage refinancing beneficial if you currently have a mortgage with an interest rate above the current market rate.
When Is Mortgage Refinancing Beneficial?
It will only be beneficial to you to undertake mortgage refinancing if it saves you money, and/or reduces your monthly outgoings enough to make life easier for you. If it achieves neither of those things, then it is not really worth all the hassle.
The following example gives a brief possible scenario. The figures themselves are for illustration purposes only. In practice, you would need to use your own figures relating to your own loans, mortgage and other outgoings, which of course vary greatly from person to person, and country to country.
Current Home Value: $200,000
Current Mortgage: $100,000
Current Mortgage Interest : 8.5%
Other Loans & Credit Cards: $15,000
Ave % Interest Of Other Loans: 14%
Monthly Outgoings:
Mortgage: $900
Loans & Credit Cards: $720
Other Regular Outgoings: $1000
Total Outgoings: $2620
After Mortgage Refinancing at a new rate of 6% over 20 years
Mortgage: $824
Loans & Credit Cards: $0
Other Regular Outgoings: $1000
Total: $1824
For simplicity, in the example, monthly outgoings are just given as mortgage, loans and credit cards, and other. The mortgage refinancing would not affect the other regular monthly outgoings, so all you need to consider really are the loans, credit cards and the mortgage.
This example clearly shows the attractions of using mortgage refinancing in this case. The combination of the lower mortgage interest rate and the consolidation of the credit card and other loans means a significant drop in monthly interest charges and repayment level. The saving of about $800, if used wisely, could mean that the mortgagee will never have to borrow again. That ability to save $800 a month, or $9600 a year, offers a wonderful opportunity to build up savings, and have the power of a cash purchaser even for a major item like a car.
Of course, not all mortgage refinancing scenarios are as clear cut, and you have to take into account any penalties for paying off your loans and existing mortgage early, plus any refinancing charges. However, if you have a home and a mortgage, and various debts, then mortgage refinancing is well worth considering as an option.
To assist with your mortgage refinancing calculations, you may use our mortgage calculator.