When you need to free up money in your budget, one way to do so is to refinance existing debt to get lower payments. Such a move has both pros and cons and you should compare loans and carefully consider if it’s the right move for you.
Types of refinancing
There are basically two ways you can refinance your debt: with an unsecured loan, such as a credit card balance transfer, or with a secured loan, such as refinancing your mortgage.
Credit card balance transfers are relatively easy to do. You can transfer balances to an existing card or apply for a new one. Credit cards also offer low “teaser” rates to entice balance transfers, so you may be able to save even more money by getting 0 percent interest for 12 months or more.
Mortgage refinancing is a bit more complicated, but it can also bring more potential savings because secured loans usually have lower rates than unsecured loans.
You can refinance your existing mortgage to lower the interest rate and, if you have enough equity in your home, you can consolidate other debt and include it in your refinance.
Pros
The biggest advantage to refinancing is lower interest rates that can lead to lower payments or quicker payoffs. For example, if you cut the rate you are paying on credit card debt from 20 percent to 15 percent, you’ll save $50 per $1,000 of debt over the course of a year.
If you need to free up money, then you can lower your payments to correspond with your new lower interest rate. You’ll pay your debt off in the same amount of time and free up more money to spend.
Another advantage to refinancing is convenience. It’s much able to keep track of one payment every month rather than several, which decreases the chance that you will pay a bill late and be hit with a penalty.
One other advantage that’s specific to mortgage refinances is that the interest you pay may be tax-deductible, which will lower your tax burden and may free up additional money.
Cons
Refinancing, while it may save you money in the long run, can cost more in the short term.
Credit cards charge you fees to transfer balances, which in some cases can be as high as 5 percent of the amount you are transferring.
Mortgage refinances have fees that can run several thousand dollars depending on the size of the loan.
In either case, you should make sure to compare loans to ensure you are getting the best deal possible. When you compare loans, you want to make sure you are comparing interest rates, fees and any other important terms.
Another potential drawback to a mortgage refinance is that you are adding debt to your home and adding to your mortgage payment, which could increase your chances of losing your home should you lose a job or run into other financial difficulties.
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