Most people are responsible for having a huge load of debt, like a high credit card balance. In this case, the first and most important priority is reducing this and you need to do this as early as possible. The longer you carry this unwanted debt with you the more is going to be the rate of interest that you have to pay.
You need to know that credit cards are responsible for coming with a high rate of interest. Getting rid of all the loans is definitely one of the best ideas that you have but it is not really easy to find the ideal finance, which can perfectly help you to do so.
If you are the owner of a home, one of the ways that you can use for reducing the balances or the rates of interest is by utilizing your home equity. This can be done by refinancing the existing mortgage that you have, cash-out refinancing or even taking out home equity loans. All three options have been explained in detail below. You can choose the one that you think is suitable on the basis of the financial condition that you are facing.
Refinancing the existing mortgage
The interest rates of mortgages are low almost always, and an important option, which you have for freeing up extra cash is by refinancing the existing mortgage at lower rates of interest, which is also responsible for reducing the monthly obligations that you have. The money that you are saving can also be used for clearing other loan amounts, like credit cards, or you can even set aside money for any kind of emergencies.
Given below is a list of the benefits associated with refinancing the existing mortgage.
- Reduced interest rate is going to help in saving money and you can also free up a lot of cash.
- Refinancing is capable of extending the length of the schedule of repayment, which further helps in reducing the monthly obligation.
Given below is a list of the disadvantages that you need to have knowledge about.
- Refinancing is responsible for costing money. For instance, you might have to face closing costs, points fees, origination fees, and also pay extra money for surveys and appraisals.
- Refinancing in order to extend your repayment time means that you have to spend more years remaining in debt, and you also have to pay interest.
Another important and popular strategy that you can consider is taking out new and larger mortgages, which are capable of clearing your old mortgage and also leaves a lot of cash, with the help of which you can start clearing the other bills.
This option is known as cash-out refinance, and for this, it is necessary that you have enough equity in your property. The equity is basically the difference between the exact market value of your property and the total amount that you owe.
For instance, if the value of your property is $300000 and you have to pay a sum of $250,000 on the existing mortgage, you have the option of refinancing your mortgage at higher amounts and receive the difference for clearing other debts.
As soon as the process of refinancing is complete, you only have to pay money to the primary mortgage lender as opposed to paying money to numerous credit card organizations as well as third party lenders. This is debt consolidation.
You are basically pulling the equity from the particular property for clearing numerous bills and also reducing the total number of creditors as well as bills.
Apart from simplifying the payments that you have to make every month; another major benefit of this technique is savings. Basically, when you decide to roll the credit card debt into mortgage, it will be responsible for a huge amount of monthly savings. To gain more knowledge regarding this, you can visit NationaldebtRelief.com.
Given below is a list of the benefits associated with this option.
- You will be able to save a lot of money because the interest rate is reduced.
- You can also reduce the total number of payments that you have to make every month.
- You need to know that the interest rate on mortgages can be deducted on income taxes. Therefore, you are actually turning non-deductible debts into debts, which can be easily deducted. This will also be responsible for lowering the total amount that you have to pay as federal tax.
Given below is a list of the disadvantages that you should know.
- If your debts are because of your nature of habitual overspending, it is crucial that you take care of your ways because there is a high chance that the financial situation can become worse again.
- Refinancing is responsible for costing between 3% and 5% of the principal of the loan apart from the additional costs of the new mortgage, like the application fees, appraisals, and the title search.
Home equity loans
Another strategy that can help in reducing debt is by applying for home equity loans, which is also referred to as the second mortgage. If there is equity within your property, it can be used as collateral for securing another fixed-rate loan and that can be used for clearing all the other debt amounts. It is almost similar to the home equity line of credit and the differences that exist are adjustable rates of interest as opposed to fixed rates. The borrower has the option of deciding when he will use this credit.
- There can be tax benefits.
- The interest rate is lower in comparison to unsecured loans or credit cards.
- This can create liens against the property, which will reduce home equity.
- If you are not capable of making the loan payment, it can lead to foreclosure as well as the loss of your property.
It is true that either of the three options can be appropriate for you. Based on the financial situation that you are in, you need to take the necessary action so that you can take care of your debt situation.