Debt consolidation and refinancing: How can they help?

Refinancing and debt consolidation are both common in the mortgage industry. Many home owners choose to refinance their mortgage at some point. Many others turn to debt consolidation for long-term financial solutions. These are two unique options with similarities and differences you must understand before considering one or the other. Here’s what you need to know!

What do refinancing and debt consolidation mean?

Refinancing and debt consolidation, while sharing the goal of aiding your finances, are not the same thing. A refinance is a course of action home owners can take if they want to readjust their mortgage terms in some way. As we have mentioned before, our mortgage needs tend to evolve and change over time, and a refinance can help keep your mortgage product up to date. Some people might want to shorten or lengthen their amortization period, meaning they will pay off their mortgage faster or slower. Others may want to switch between a fixed-rate and variable-rate product. This is a common decision people make during times of rapid rate changes, where one type of mortgage tends to be more beneficial than the other. A home owner might be looking to complete home renovations, and they want to access their home equity through a refinance to support the costs of this project. Your mortgage is a powerful tool, and a refinance helps you shape it to meet your needs. 

Debt consolidation takes things a step further. This option takes all of your existing debts and combines them into one lump sum, also called a refinance. Each month, you will just make one payment that addresses all of your debts, instead of making several individual payments with different lenders and rates. Usually, the interest rates in these cases are lower than some of your current rates, which helps you save money on interest. It is also helpful to only have one payment to keep track of, especially if you tend to forget to make your payments on time. You still have to pay off all your debts, but in a more manageable format.

Who benefits from which option?

Between these two, who is best suited for each? Refinancing is a great option for those who are just looking for a way to change their mortgage term. Whether you are hoping to switch products, secure a better interest rate, access prepayment privileges, or anything else, a refinance might be the best tool to get you there. It is less targeted towards those who need financial relief or a better way to manage their debt. Instead, it adjusts your mortgage in order to improve your homeownership experience.

Debt consolidation can be great for people who are struggling more with their debt and finances. Those who have multiple financial obligations in the form of credit cards, mortgages, car payments, and student loans might find it tricky to make all of their payments and manage so many different interest rates. In this case, debt consolidation can be quite beneficial. Similarly, people who find it hard to manage their payments due to how many there are can be good candidates for debt consolidation. This simplifies your payment plan and sets you up for success by reducing the number of interest rates you have.

Are there any risks?

The biggest risk with either of these options is making a decision without fully considering how it will impact you. If you are considering a refinance, it is important to evaluate the costs and gains this move will provide you. Breaking your mortgage term will cost you, which is not a problem as long as the benefits outweigh that penalty long-term. For example, if you have to break your term, but you can save thousands of dollars in interest, this could be a good decision. However, you don’t want to put the time and money into a refinance if you will not save more than you had to spend. In terms of debt consolidation, this can temporarily lower your credit score. If you make your payments on time, your score will rebound, but this is something to be aware of. Debt consolidation is not a decision you should rush into without consulting a professional.

How can a mortgage broker help?

Speaking of professional help, make sure you work with a mortgage broker! If you think either a refinance or debt consolidation is the right path for you, you must talk it through with a broker before committing to anything. Brokers can identify pros and cons you likely hadn’t thought about. They can tell you whether you are making a decision that will benefit you long-term. There is no risk or cost involved when you go to a mortgage broker for help! The only thing we can do is help you save money and make choices that will serve you better. The bigger risk is not consulting a broker and ending up in deeper financial trouble as a result. 

Refinancing and debt consolidation can be great for certain people when used properly. If you think you might be a good candidate or you are wondering about homeownership, be sure to reach out! We can help you understand your situation and where it’s headed. 

If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.