Mortgage Refinance & Debts

by : Donald Saunders

The typical mortgage is designed to run for a long time and there can be very good reasons for looking to refinance a loan that was arranged a few years ago. For instance, if there has been a substantial fall in interest rates since your mortgage was taken out you might want to refinance to both lower your monthly payments and reduce the overall sum to be paid in interest during the remaining years of the mortgage. Likewise, you might want to use some of the increased equity in your property to help with putting your children through college or to pay for home improvements.

However, when it comes to refinancing your mortgage in order to meet such things as credit card and similar debts you need to think very carefully.

Refinancing a mortgage can be a complex process and will frequently involve you in almost as much work as you went through to get your original mortgage. For instance, you will be required to produce details of your present earnings as well as copies of previous tax returns and a variety of other paperwork. You will also normally be required to meet some fairly high refinancing costs and these have to be added into the equation when working out the total cost of this as a debt clearance solution.

Although mortgage refinancing can of course be used as a solution to clear credit card and similar debts, there are other solutions which are probably better in most cases. For instance, as long as you have a good, or at least reasonable, credit history and also have reasonable equity in your property then you might look at a second mortgage or a homeowner's equity line of credit (HELOC). These solutions would usually cost a little more than re-mortgaging but are generally much easier and provide you with far greater protection if you run into financial problems at a later date. For example, one advantage is that if you are late with payments on a secondary loan, or miss payments, you are unlikely to lose your property, which can happen if you run into difficulties making repayments on a main mortgage.

The real reason however for thinking carefully about re-mortgaging to clear your debts is that what you are essentially doing is borrowing money to clear your debts when your problem is that you are probably in debt because you borrowed too much money in the first place. In other words, the answer to clearing your debts should not really be to simply borrow more money and run the risk of making an already bad situation even worse. This is a mistake which so many people today make and, having started with $5,000 of debt, they borrow money to clear this debt and twelve months later end up having problems paying down their debt again, except that now their debt has risen to $10,000.

In certain circumstances refinancing your mortgage might be the answer but, when this happens, it is normally because your personal circumstances mean that you have few choices open to you and this is the best of a poor set of choices. In ninety percent of cases however there will be a better answer and you should only opt for re-mortgaging if you really do have no other choice.