Many loan agents promote home loan refinancing as the path to debt freedom. Refinancing can be either a way to reduce your debt, a way to reduce the amount of your monthly payments or a cheap source of finance. However, depending on your home loan terms and the new loan conditions, refinancing can contribute to reducing or augmenting your debt.
You need to be extremely careful when considering refinancing since it’s a very complex financial operation and there are many variables involved that if not considered carefully, they can affect the results turning the financial transaction into an extremely onerous decision that may increase your debt against your will.
Daily Finance Eased
Refinancing your home loan can alleviate your daily finances. By refinancing your home mortgage with a longer repayment program and / or a lower interest rate, you can lower your monthly payments and thus, the amount of money you destine towards debt payments will be considerably reduced.
However, this doesn’t always come at no-cost. If you get a lower rate and a longer repayment program, you may be saving money but you’ll have to be indebted for a longer period of time. If you get a higher rate and a longer repayment program, you may get lower or higher monthly payments depending on the intensity of the increments and you may also get some ease for your finances but you’ll also be attached to the loan for a longer period of time. Only an equal loan term and a lower interest rate can save you thousands and not oblige you to a loan for longer periods.
Long Term Commitment to Mortgage Payments
The opposite of the above is also true. If you want to hasten the date where you’ll finally be debt free, you’ll have to compromise your income to debt ratio. Shortening repayment programs will raise your monthly payments as a higher rate would do. This can be compensated by a reduction on the interest rate but this cannot always be achieved.
By refinancing for shorter repayment programs you will be affecting your income since you’ll have to destine higher amounts towards debt payments. So, when it comes to refinancing, you’ll need to ponder all and reach equilibrium between all these variables so you don’t extend your debt-slavery too long and you don’t affect your income to debt ratio either.
The Right Path Towards Debt-Freedom
What you need to do is reduce your overall debt and since home loans are the cheapest sources of finance, it is wise to extend the repayment programs (even if the rate goes up) because by lowering the installments you’ll be able to use the surplus to repay other debt. Of course, this requires discipline on your behalf since a chaotic credit behavior will worsen your situation.
If you can get approved for a cash-out refinance home loan, you’ll be able to use the extra money to cancel outstanding and more expensive debt which will contribute to achieving debt freedom sooner. Remember, exchanging your expensive debt for cheaper financial sources is the smartest and most intelligent thing to do.
