Should I Refinance

It is not unusual to consider a refinance or home equity line of credit at this time of the year.  This is when all those bills come due from the holidays during the last two months.    What is unusual is that today’s interest rates are near their all time low and are incredibly attractive.  So, what is better: to refinance or to struggle to pay the bills with cash available?

If your credit cards have high balances and high interest rates, it can make sense to do a debt consolidation refinance of your home.  It is very important to remember, that if you do so, you will have a higher home loan balance, possibly a higher monthly payment and no home equity to use later.  If you have enough cash available to pay down or pay off your credit card balances, it may make more sense than to refinance.  Get straightforward answers to when to refinance.  Visit and be connected to an experienced mortgage professional  who can answer your mortgage finance questions, giving you several options, so you can make your own INFORMED decisions about when to refinance.

A little information now, may help you decide what you want to consider.  Here are some popular types of financing used to pay off overwhelming debt.

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  • A Consumer Loan.  A consumer loan is not collateralized.  There is no lien placed on your home as a result of taking out a personal or consumer loan.  Since the loan is not collateralized, the risk of default is higher, so the interest rate on a consumer loan is generally higher than a home equity line of credit or a mortgage loan interest rate.
  • HELOC.  A HELOC (Home Equity Line of Credit) is collateralized by another lien on your home, even if the bank issues you a “debit card” to use to access your line of credit.   You pay interest only on the amount you use, but because the line of credit is backed by your home, the interest rate is usually lower than a standard credit card.   It is important to note that the interest rate on a HELOC is usually adjustable, and the monthly payments vary, based on use of your line of credit.  Interest rates on a HELOC are generally lower than interest rates on a consumer loan but higher than interest rates on a first lien position home mortgage loan.   A HELOC can be great for paying off high interest rate credit balances from home improvement or appliance purchases etc. but are not good to use for shopping excursions, because using the credit limit on your home equity line of credit reduces the equity you have in your home, which reduces your personal wealth.  The situation is different If you are already carrying the debt, and are struggling to repay.  In that case, a home equity line of credit can give you the breathing room you need, by basically transferring your debt balances to a lower interest based credit line with a more manageable monthly payment.

  • Second Mortgage.  If you are facing uncontrollable debt, you may need to consider taking out another mortgage on your home.  Like the HELOC, a second mortgage is collateralized by your home.  It places another mortgage lien behind your first mortgage lien.  Unlike the HELOC,  a second mortgage is a set amount, with set monthly payments and usually a fixed rate of interest.  You pay interest on the entire amount of the second mortgage, so only take out what you feel you need, to pay off your debt. 
  • Home mortgage refinance.  When you refinance your home mortgage, you are taking out a new mortgage, which pays off the former mortgage or mortgages.  A debt consolidation home loan refinance will pay off existing mortgages, as well as other debt.  The advantage of refinancing is that you will still have just this one mortgage payment, at a lower rate than credit cards.  The disadvantage is that you just extended your repayment period and have used up the equity on your home.  That means it may not be available to you if you are back in debt next year. 

Your monthly payment may actually go down when you refinance your mortgage, so if you are looking to make your monthly payments more manageable, the extra time to pay off the mortgage could work in your favor.  You will still use up more of the equity in your home, but if you are running short of funds before your monthly bills are paid, equity may not be the highest priority.