With interest rates at a true low point, NOW is the time to consider consolidating your debt or refinancing your home. This article will provide you with an understanding of these solutions, why now, and how they can save you a lot of money in the long term.
Why NOW is the Time to Refinance
Many of us rely on loans to live the lifestyles that we want. Even the most loan-free individuals among us will likely be paying back a home loan and/or an auto loan. These are recurring payments that come out of our accounts each month (or quarter) and while they might not seem like huge amounts individually, they certainly add up over time.
When we take out any loan, we will be at the mercy of the interest rates offered to us. These are based on many factors, including our personal credit scores, inflation, levels of economic growth, and the Federal Reserve Monetary Policy1. The higher the interest rate, the more we will need to pay back. This is often written as APR (annual percentage rate)2, which refers to the percentage of the total loan we repay each month.
This is true for both home loans and for personal loans. Even credit card rates and overdraft terms will change in response to your circumstances and the fluctuating market. Thus, if you take out a loan of any kind when interest rates are high, you will be charged more than if you take them out when rates are lower.
That’s why it’s important to be on the look-out for opportunities to switch. The good news is that we are not “stuck” with any one loan, and the option is always there to jump ship. Two options include debt consolidation, and home refinancing. And it’s times like right now that these can prove to be excellent options.
Debt consolidation describes the act of taking out a single loan in order to pay off multiple others. For example, if you had a mortgage, a credit card loan and another bank loan that you used to buy a bike for example, you could then consolidate all of these debts by taking out one larger loan that would pay off all those three loans. This can be done “manually” – as in handled on your own (i.e. you take out the loan and pay off the debts with it then concentrate on paying off the final loan) or using a debt consolidation service or company who can also help advise you, discuss options and negotiate terms and potentially even reduce some of your other debts. Often debts are consolidated into a single home loan.
There are many reasons to consolidate your debts into a single loan. The most obvious reason is to benefit from lower interest rates or a fixed interest rate. For example, if you have one or several loans with a particularly high interest rate, you can pay them off with a single loan that has a lower interest rate and thereby decrease the overall amount you will be paying. Again, this is why it’s such a good idea to consider this strategy now while rates are at their lowest.
It’s even possible to get loans at zero percent APR in some cases, helping you to save a lot of money on your interest. Of course, you are unlikely to get home financing with 0% APR!
More Advantages of Debt Consolidation
Just the fact that you have interest on a single loan rather than multiple loans can also make interest much easier to calculate and to plan for, and can make the loans themselves much easier to pay. If you have about five loan repayments coming out of your current account it can be highly stressful and very complicated, whereas having just one on a regular basis can make it easy to plan for and pay.
Using a service to consolidate your loans can also often make the loan repayment more flexible to suit you – you can pay it off more quickly in several larger lump sums, or can drag it out over time. You should also be able to set the day that the repayment comes out to help fit it around your other financial commitments. In these ways loan consolidation is sensible from a practical stand point as well as a financial one.
Secured vs Unsecured Loans
Sometimes this loan is simply another loan much like your others (this is called an “unsecured” loan), however in most cases the loan is taken out against an asset of the borrower as collateral. Most commonly this asset is the borrower’s home and the mortgage is secured against the house.
Here, by using the mortgage as collateral, the interest rate is able to be lower than it would otherwise. Thus consolidation of debt into a home loan is able to save you even more money. The down side of course is that the borrower agrees the foreclosure of their asset (in this case the home) to pay back the loan. However, for those who are not in a desperate situation and can afford to pay back their new loan comfortably, this is a sensible way to save money and unnecessary stress. In a similar vein mortgages can also be increased, or you can take out entirely new mortgages, to pay for extra work around a house or other expenses rather than paying for various separate jobs individually. This is similar in theory but requires more forward planning. This two could be considered a type of debt consolidation using a home loan, except using the reverse process to that outlined above.
By including your home loan in your debt consolidation, you’ll also be refinancing your property. This is a great option, seeing as your home loan is very likely to be the highest-interest and largest loan that you are paying back each month4.
Of course, you may decide that debt consolidation is not for you, and that you don’t have enough ongoing loans that require consolidating. In that case, you might opt simply to refinance your home loan. This then means that you’ll be taking out a new loan to replace your current one. This can not only reduce the interest rate if you time it correctly, but also help to cut monthly payments and even allow you to withdraw some equity to gain a cash injection!
Remember when refinancing your home loan, you will have the opportunity to reduce the total amount that you are repaying. You might be tempted to reduce your monthly costs and thereby enjoy a greater cash flow, but you might also alternatively choose to keep repayments consistent and simply shorten the amount of time you’re repaying that loan. This way, you could be mortgage-free five years earlier simply by switching while interest rates are down!
Likewise, don’t make the assumption that becoming mortgage-free quickly is necessarily the end goal for everyone. There is no right or wrong answer here, just the opportunity to readjust your finances to better suit your lifestyle and goals.