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Is it a good idea to refinance with a debt consolidation
loan, or are you just making matters worse? The answer
depends on your situation. First, let's look at the
concept behind a refinance debt consolidation loan.
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To refinance means to finance again. For example,
if you have a loan from a bank or finance company
and you borrow more money from them, that would
be refinancing your loan. If you got a refinanced
your loan to borrow more money, that type of
refinancing would be known as a credit
card debt consolidation loan, because you
are using the new loan from the bank to repay
all of your credit card debts.
Typically a refinance debt consolidation loan
is done by homeowners who want to unlock the
equity in their homes to repay other debts,
such as high interest credit cards.
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Here' s an example:
You owe $40,000 on credit cards, and you have a $110,000
mortgage on your house. Your home has increased in
value, so it is now possible for you to borrow more
than the $110,000 you currently owe.
You could approach your mortgage lender and ask them
to increase your mortgage from $110,000 to $150,000.
You would then take the extra $40,000 and repay your
credit cards. Since the mortgage interest rate is
lower than the interest rate you are paying on your
credit cards, this refinance type of debt consolidation
loan will save you a significant amount of interest.
Another type of refinance debt consolidation loan
is called a cash out refinance loan.
Instead of re-negotiating your mortgage, you could
simply borrow the $40,000 you need by taking out a
second mortgage, or a line of credit secured against
your home. This is called cash out refinancing, because
you are taking cash out of the equity in your home,
and then using it to repay other debts.
Whether you get a new first mortgage,
or a second mortgage, you should calculate all costs
carefully to decide which option makes sense for you.
There are generally penalties to break
a mortgage, and fees charged by mortgage brokers.
Interest rates are also important, since you don't
want to exchange a mortgage you obtained when rates
were lower with a mortgage at higher rates.
However, a cash out refinance debt consolidation
loan may save you a lot of money, so research your
options, consider all costs, and then make the decision
that will work best for you and your family.
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