7 Reasons Debt Consolidation Refinancing Can Hurt
Debt consolidation can work for some people, but not for everyone. In fact, such refinancing can be damaging in many cases if the person taking on the loan is not prepared for it, able to uphold their side of the agreement or if it simply was not the right one for them at the time. There are seven main reasons that debt consolidation refinancing can really hurt and these reasons should be taken very seriously before reconsidering using your prized asset, your home, as a means to get more funds for whatever reason it may be.
The sole purpose of debt consolidation refinancing is obvious – use the equity in your home to consolidate all your current debts and pay them off quickly. However, though such loans are available to all people with all levels of credit, the benefits may vary so greatly that many will not get the good deal that they were hoping for an end up in a serious mess or struggling to survive even if they can make their repayments. In fact, the top seven reasons may not be as obvious as you might believe:
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An unstable life can result in repayment defaults and deepening debt or even bankruptcy. Never invest in refinancing if your life is too unstable. Moving home or taking advantage of the equity in your current home if your plan on moving in under two years, are going through divorce, are relocating your job or have been offered a raise can seriously destabilize your life for a short period of time and may upset your ability to make repayments.
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Private mortgage insurance may not cover everything and adds more costs to your repayments. Lenders demand you have it in case of sudden death, unemployment or other adversities, but when your loan covers more than eighty percent of your home’s equity then you run the risk of getting behind. You can request that you stop the insurance, but whether the lender will agree may be a different matter.
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Variable interest rates can go up dramatically during times of economic slowdown or recession and make repayments so high that you may not be able to cope with the payments any longer. Always choose a fixed interest rate and then you will always know what you monthly payment should be.
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Debt consolidation refinancing seriously damages your credit score because you show that you had insufficient funds to pay your regular lines of credit and bills and have had to incur further debt to get out of debt, seen by many lenders and credit bureaus as a sign of financial irresponsibility.
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Interest rates on debt consolidation refinancing are usually higher than those of a regular refinancing loan. These are combined with additional charges and the risk of late payment charges, which all raise the balance of your debt very quickly.
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The lengthy period of repayments makes you more likely to default should serious financial woes strike. You are more likely to lose your home and other possessions.
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High interest rates on these types of loans means that you spend the majority of your repayments paying off your interest and scraping the surface of the debt balance. This means that it will take years to get this paid off.
It may seem that debt consolidation refinancing is the answer, and in some cases it is the only answer, but consider your options before taking this road. Research each lender and always make sure you are getting the lowest rate of interest and the least amount of charges. Preferably, if you can wait and get your monthly payments for your current mortgage, if you have one, and your bills and other debts on track with a show of willingness to pay, you are more likely to get help from your original lender or from those who will see that you are worth the risk of a loan.
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Tom Humes