Personal debts can sometimes run away with certain consumers and, no matter if an emergency is the cause or simple poor financial planning, many consumers find that they cannot easily meet the monthly payments that are owed on the total amount of various debts, and when this is the case, many often turn to consolidation options for their personal debt. While there are personal loans that can be used to consolidate a consumer’s debt, some use refinancing as a way to access the funds they need to erase these unsecured debts and, essentially, attach what they owe to their home loan since many homeowners feel they will be paying this debt for years to come and, if it will provide debt relief in other areas, adding more to their mortgage principal is the best option.
While homeowners have been able to benefit from cash-out refinancing as a way to consolidate personal debts, there are some dangers that can come with using a home for unsecured debt relief assistance, as many homeowners may look to pay off personal loans, student loans, or even credit cards by essentially offering their home as collateral. What this means is that homeowners will refinance their home for more than a homeowner owes, and then use the difference that they receive to pay off these debts.
However, Bankrate.com makes mention of this topic and outlines for homeowners the fact that cash-out refinancing for personal debt relief and consolidation purposes is not the same as a home equity loan, so homeowners must look at these options if they feel this form of consolidation is right for them. Again, cash-out refinancing is used when a homeowner refinance their home for more than they owe and uses the extra money to pay off various debts or as a way to, in some cases, pay for costs like a child’s college tuition. Yet, a home equity loan is an entirely separate loan but has sometimes been used by consumers for the same purpose.
When it comes to refinancing for personal debt consolidation, consumers must make sure that a certain set of factors are in place as this form of debt consolidation and debt relief may not be helpful if a consumer is not in the right financial situation. Many homeowners will opt to use cash-out refinancing for the purposes of debt consolidation because they will not have to acquire a second home loan, as is the case with a home equity loan, and when low interest rates may be available, a homeowner could refinance for a lower rate, which may lead to lower costs in some aspects.
However, homeowners do need to understand that the overall costs that they may have to meet, even if cash-out refinancing does bring a lower interest rate, will be higher in many cases since they are increasing their mortgage principal by refinancing for more than they owe on their home. Some homeowners are okay with this fact as long as they can find some form of debt relief on other sources of debt obligations, but homeowners must also understand that since they are adding unsecured debts onto a secured home loan, the inability to meet this higher overall mortgage payment obligation will result in the loss of their home if an individual is unable to meet this requirement.
While personal debt relief through consolidation is one way that homeowners and other consumers in general have been able to lower their overall debt obligations from month to month, this particular type of refinancing for the purposes of debt consolidation can be quite risky and homeowners are prompted to take caution if they feel that a debt consolidation loan through cash-out refinancing is in their best interest, as again, some homeowners may not be able to afford the fees that come with refinancing, may be unable to get a lower interest rate on their home loan by refinancing, and obviously the potential loss of a home are just a few factors that homeowners must consider.