Some homeowners choose to finance back to consolidate their existing debt. With this type of option, homeowners can consolidate higher flower debts such as credit card debts with lower home loans. Interest rates related to home loans are traditionally lower than rates associated with a large amount of credit cards. Deciding whether to finance back for the purpose of debt consolidation can be a rather complicated problem. There are a number of complex factors that enter the equation including the number of debt, interest rates and differences in current loan requirements and financial situations from homeowners.
This article will strive to make this problem less complex by providing a function definition for debt consolidation and providing answers to two main questions homeowners must ask themselves before financing. These questions include whether homeowners will pay more in the long term by consolidating their debt and will have the financial situation of the homeowner increasing if they finance again.
What is debt consolidation?
The term debt consolidation can be somewhat confusing because the term itself is rather deceiving. When the homeowner finance his house for the purpose of debt consolidation, he actually did not consolidate debt in the real sense. By definition to consolidate ways to unite or join into one system. However, this is not what actually happens when debt is consolidated. Existing debt is actually paid by debt consolidation loans. Although the total amount of debt remains constant, individual debt is paid by new loans.
Before the debt consolidation of homeowners may have paid monthly debt into one or more credit card companies, car lenders, student lenders or a number of other lenders but now homeowners pay one debt to a mortgage lender that provides debt consolidation loans. This new loan will submit to the provisions of the applicable loans including interest rates and repayment periods. Every term associated with individual loans no longer applies because each of these loans has been fully paid.
Do you pay more in the long run?
When considering debt consolidation, it is important to determine whether a lower monthly payment or an increase in the overall savings is being sought. This is an important consideration because while debt consolidation can lead to lower monthly payments when lower interest mortgages are obtained to repay higher debt, not always the overall cost savings. This is because interest rates have not determined the amount to be paid interest. The amount of debt and a loan period, or the length of the loan, the numbers prominently into the equation too.
For example, consider debt with a relatively short loan period for five years and interest is only slightly higher than the level associated with debt consolidation loans. In this case, if the debt consolidation loan period is 30 years the original loan payment will be stretched for 30 years with an interest rate which is only slightly lower than the original level. In this case the homeowner clearly may finally pay more in the long term. However, monthly payments will probably be reduced dramatically. This type of decision forces homeowners to decide whether the overall savings or lower monthly payments are more important.
Do financing re-enhance your financial situation?
Homeowners who consider to refinance for the purpose of debt consolidation must consider carefully whether their financial situation will be increased by return financing. This is important because some homeowners can choose to finance because it increases their monthly cash flow even if it does not produce overall cost savings.