"Refinancing Does Not Always Solve Debt Problems" 

Refinancing does not always solve debt problems. Find out how to consolidate your debts and evaluate your financial situation to avoid future debt problems. When considering consolidating all your debt into a lower monthly payment needs to be carefully evaluated. Some homeowners who use their homes like "cash registers" by refinancing repeatedly until all the equity is gone. That is very bad.

Let's consider the following example where a homeowners owes $250,000 on a mortgage, and $75,000 on a second mortgage, $30,000 in credit cards and owe $20,000 on our car. Would it be in this borrower's best interest to refinance the whole amount into one mortgage?

Usually people who have so many loans are most likely to be in trouble because they have made the decisions to make some many purchases and they find themselves to be into debt and maybe start feeling that they are in trouble making all those payments every month.

Let's assume the following example:

Total monthly payment is $3266.22. Now let's assume you decide to consolidate all your debts into one monthly payment and that your credit is not the most fantastic since you accumulate all those debts. You can refinance and your new loan will be $375,000 @ 7% rate. Your new monthly payment will be $2,494.88 thus $771.34 less every month.

Based on the above, you would be saving money in monthly payments in the short term but you would be paying much more money in interest in the long term. BUT, should you default on your payment, you could lose your home.

Another very important option for you to consider may be to take a look at your expenses and see how you spend your money versus your total monthly income. If you continue spending more money than you bring in every month you will continue accumulating additional debt. Your options could include downsizing and moving into a less expensive house with a smaller mortgage, trading down to a less expensive car, and cutting back on other expenses to bring your finances into shape.

Changing job or taking a second job is also another viable option. One action you must take, if you are to be successful with either choice, is to stop using credit. You should always make sure that you spend less than you earn. YOU MUST SAVE MONEY EVERY MONTH and I suggest that you put aside about 10% of your total income that you can use in case of an emergency.

It is very important that you assess your financial situation every month. You MUST use a "Monthly Expense Sheet" to evaluate your financial situation. If you see that you spend $300 more than your monthly income, then you will know that you have to either cut your expenses, find a better job or take a part-time job. 

What are valid reasons for refinancing?

In general, there are 4 good reasons to refinance your mortgage. First, to lower your interest rate, thus your monthly payments. Second, obtain a shorter-term loan to build equity more quickly. Third, to take cash out of your property. Four, Opportunity to convert your loan from an adjustable rate to a fixed-rate installment loan or vice versa.

It's All About You!