Many homeowners that have acquired a large amount of debt often turn to a debt consolidation refinance loan. Debt consolidation refinance loans, or cash out refinancing as it may be also known, is essentially paying off debt, like credit card debt, by using the equity in one’s home to do so.
There can be benefits to this debt consolidation refinancing option as it simply brings debt that may have higher interest rates associated with it into a lower interest home loan. For instance, someone may have more equity in their home than the total of their debt outside of their mortgage and by getting a debt consolidation refinance loan many people use the money they get back from the equity in their home to simply rid themselves of their debt.
However, that debt that was in the form of things like credit cards is now attached to one’s home. This could be problematic in that since anyone who uses their home as a way to pay off debt may end up losing their house. Credit card debt is unsecured and while it can hurt your credit score when it’s not paid it will not cause you to lose your home.
By getting a refinance loan in order to consolidate debt you are essentially putting the amount of debt owed into your home loan, which is beneficial for the lower interest rate, but if you are not careful to pay off this higher home loan amount you may default on your mortgage or worse.
Essentially, someone who has a lot of debt may need to rethink their financial habits, spending habits, and make sure that if they do choose a debt consolidation refinance loan they are going to be able to not only make the payments on their home loan, which is now a greater value, but also not accrue any more debt seeing as how tacking debt onto one’s mortgage doesn’t make it disappear and acquiring more debt isn’t going to help matters in the least.
If you are in a financially troubling situation with debt and are considering this type of loan you must be certain you will be able to not only keep debt at bay but also structure your spending habits and budgeting practices to where they will afford you the ability to pay off your home loan.