Refinancing – Know the Difference Between Refinancing & Debt Consolidation?

01.05.2013

It’s not unusual for many to fail to distinguish between refinancing and debt consolidation. Some misunderstanding creeps in when people get their home refinanced and simultaneously go for a debt consolidation too. An understanding of the merits and demerits of each, helps deciding the most appropriate option for your current status.

Refinancing

Refinancing allows the borrower to seek amendment of the original terms of paying back the loan. The two main terms of any loan are the amount to be paid back and the period over which it needs to be paid back. It’s not difficult to understand that the longer the duration of the loan or the higher the rate of interest, the more is the liability of the borrower. You may opt to get the loan refinanced to pay a lower rate of interest or choose to pay back the loan over shorter time frame. On refinancing, you original loan amount is paid and you are given a revised payment schedule and amount to be paid. So, refinancing enables you to save by way of payable interest and by shortening the duration of the loan. On getting the duration of loan extended, you’ll be paying   more interest. It will be in your interest to go for refinancing if you are offered lower rate of interest.

Debt Consolidation

Debt consolidation means you borrow funds to pay out quite a few numbers of other loans, allowing you make just one monthly payment to cover all loans. That makes things convenient for you. Some may opt for it by taking a second mortgage on their house and cash out the accumulated equity. This attaches debt to their house and exposes it to risk, should they fail to pay loan. The other option is to take unsecured loan and consolidate your debt. In this case, you’ll be paying slight more interest, without reducing the element of risk.

Debt Consolidation with a Refinance

You may refinance your first mortgage due attractive interest rate but borrow more than what you owe and use extra funds to clear other debts. That means you refinance and simultaneously consolidate. The best feature of this arrangement is that you can shift unsecured debt to secured debt. It means you are guaranteeing to pay it back with your home. If for any reason you are unable to pay the whole amount, you may lose your house. Still, if your mortgage is detached from other debts, you may decide not to pay other debts and save your house.

Choosing Between Refinancing and Consolidation

Getting your loan refinanced at a lower rate of interest enables you to save your mortgage amount. You may also be able to payback faster. You can better manage your monthly installment through consolidation and pay a fixed rate of interest that’s generally lower than rates charged by Credit Card Company. It is therefore recommended not to connect the debt to your home, in case you intend doing both, as that could expose the house to risk.

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