Home Mortgage Refinance Considerations Before Refinancing a Loan

The most common reason for performing home mortgage refinance is to take advantage of a more favorable rate of interest. This is closely followed by secured debt consolidation, reducing monthly repayments, greater payment certainty and the release of equity. In practice, there is normally a combination of reasons for refinancing a home loan. Prior to trawling the market for the lowest mortgage rate refinance offers, there are other vital considerations.

Uncertain Future Plans and Home Mortgage Refinance

The decision to refinance a mortgage may appear to be logical, but it’s important to have an appreciation of future plans before signing-up. Will an upcoming promotion involve relocation? Is a close family member, who lives in a different state, likely to need help and support? Nobody can accurately predict what the future holds, but it is possible to avoid some of the more common pitfalls. Redeeming a loan prematurely will offset the savings realised from refinancing a home mortgage.

Refinance a Mortgage to Consolidate Debt

A lot of homeowners refinance partially or fully to consolidate debt. Rather than paying back lots of small debts to different creditors, it seems logical to put all debt obligations under one roof and make a single, affordable repayment at month end. Although a secured debt consolidation loan reduces the amount of disposable income that goes towards servicing debt, there are potential pitfalls.

 

Despite the lower rate of interest and monthly repayments, extending the repayment term means that the cumulative interest paid over the life of the loan will be a considerably higher. Turning unsecured into secured debt also gives lenders greater collection powers in the event of default. Not keeping up with the repayments could lead to mortgage repossession and the loss of the family home.

Home Mortgage Refinance Requires a Good Credit Score

Refinancing a home mortgage is relatively easy, but securing the lowest rate of interest requires a good to excellent credit rating. Amy Fontinelle of Investopedia stated: “Many lenders will want you to have a high credit score and ask you to provide full documentation of your financial situation, such as recent pay stubs, bank account statements, tax returns and more.”

The lower the applicant’s credit score, the more expensive it will be to refinance a mortgage. Although bad credit refinancing is available, the rate of interest will be a lot higher. There may also be additional charges as well. Rather than performing mortgage refinance with bad credit, it’s better fix bad credit problems first. Poor credit, such as defaults and delinquencies, will show on a personal credit report for up to 7 years.

Pros and Cons of Home Mortgage Refinance

As well as improving affordability, the lowest mortgage rate refinance can help to reduce the total amount of interest that is paid over the life of the loan. However, consolidating debt, especially if that debt is unsecured, is rarely a prudent strategy because it usually has the opposite effect. Don’t just look at the rate of interest, scrutinize the charges as they are likely to erode any potential savings.

In Debt and Not Sure What Road to Take to Get Out of Debt?

Debt consolidation loans

These loans can be a lifeline but they can also be fatal as I found out through experience! The main questions you have to ask yourself are….are you in control and do you have the willpower required?

If the answer is yes, then this type of loan may work for you.

  • Put all your loans and credit cards into one basket.
  • Take the loan out and pay all your loans and cards off in one fair swoop.
  • One monthly payment to make with a lower interest rate than you were paying.

Now this sounds good and very tempting, but if you’re anything like me then you will take your loan out for a little bit more and buy yourself that huge plasma television screen you saw down at the shops the other day!

 

Then instead of cutting up your credit cards and sending them back to the company, you keep them and put them somewhere ‘safe.’ This is a bad move as this is just leading to temptation! Your credit cards are clean, what’s stopping you from going on a shopping spree again, promising to pay it off the following month? Then you find that cheap last minute holiday, and just stick it on the credit card.

Now you are back to square one with a huge consolidation loan, plus you have built up your credit cards again and are struggling to pay them back every month. Do you now take out another debt consolidation loan to pay off your existing one or do what I did? You may choose to take out a debt management plan; read on to find out more.

Debt management plans

These have had a lot of bad press just lately, but companies who take money off you to help you get out of debt, I mean come on, think about it for a moment. Have you read the small print of your credit card statement? I did and it was the best thing I ever did, I discovered Payplan, they are government funded and so they don’t need to charge you in order to help you.

Payplan don’t advertise anywhere, but if you do a Google search you will find them. They are there to help you and set a budget by which you can live on and breathe easier at the same time!

Key points are:

  • They don’t charge a monthly fee
  • They contact all your creditors directly and do all the hard work for you
  • You can manage your account online
  • They are approachable and more importantly, they are there to help you
  • They will set you a realistic budget that you can survive on

Bad points include:

  • Your credit score will set all the alarm bells ringing
  • You won’t be able to get any credit at all

But the flip side of the coin is that the reason you’re looking at this article is that you are already up to your neck in debt, the last thing you need is to take out even more credit. It is extremely hard to cope with at first and will probably take you at least a year to come to grips with your new budget.

Your plan will be reviewed every year, and your creditors will want an update every 3 months, but on the whole they appreciate that you are taking steps to paying your debts off in a responsible manner and are more likely to accept Payplan’s payment plan, as at least they will get their money back eventually.

So please think hard before you take out a consolidation loan, as really it’s not going to help you if you have not got the willpower to cut up your plastic!

A debt management plan may be a slower process to paying off your debts and you won’t be able to get any credit (not even a Dorothy Perkins card!) but this is a good thing, even though it feels like you’ve just chopped off your hands.

Good luck, and I wish you a debt free future.