Some homeowners opt to re-finance to consolidate their existing debts. With this type of option, the homeowner can consolidate higher interest debts such as credit card debts under a lower interest home loan.
A debt consolidation loan enables the homeowner to use the existing equity in their home as collateral to secure a low interest loan which is large enough to repay the existing balance on the home as well as a number of other debts such as credit card debt, car loans, student loans or any other debts the homeowner may have.
This article will attempt to make this issue less complex by providing a function definition for debt consolidation and providing answer to two key questions homeowners should ask themselves before re-financing. These questions include whether the homeowner will pay more in the long run by consolidating their debt and will the homeowners financial situation improve if they re-finance.
What is debt consolidation? The term debt consolidation can be somewhat confusing because the term itself is somewhat deceptive. When a homeowner re-finances his home for the purpose of debt consolidation, he is not actually consolidating the debt in the true sense of the word.
By definition to consolidate means to unite or to combine into one system. However, this is not what actually happens when debts are consolidated. The existing debts are actually repaid by the debt consolidation loan.
These multiple debts still remain the same amount when consolidated. Usually the interest rate on a home loan can be lower than they are on your existing debts.
The mortgage company that consolidated the loan has actually put all these former debts into one, this can include debts on credit cards, on cars, or on school loans. When consolidated, the consolidated mortgage loan is the only thing you have to worry about. This means you’ll end up with a lot less administration.
This new loan will be subject to the applicable loan terms including interest rates and repayment period.
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