What is Refinancing? What is Debt Consolidation?


When a lender agrees to change the original terms of a loan, this is referred to as refinancing. Mortgage loans are the most common to be refinanced, although cars and personal loans may also be eligible. When it comes to refinancing, people who own their own home have several options for lowering their payments and getting extra cash if desired.

Cash Out Refinancing

With this type of mortgage loan adjustment, the borrower takes out a loan that has a greater value than what is owed on the current mortgage. As an example of how this works, if a mortgage holder still owed $100,000 on his or her home and took out a loan for $125,000, the original mortgage loan would get paid off and the borrower would have $25,000 in cash available. The mortgage loan would then be re-written for $125,000.

Other Options

Homeowners often choose to refinance their mortgage loans when interest rates drop and there is a good possibility of saving a lot of money over the life of the loan. If refinancing is not a possibility, homeowners may consider a home equity loan or a home equity line of credit. With the first types, mortgage holders borrow against the equity built up in their home and receive a loan in one lump sum. This is an instalment loan, and the payment remains the same each month. A line of credit tied to a mortgage is similar to a credit card in that the borrower can use the available credit several times and at his or her own discretion.

Benefits of Refinancing and Home Equity Loans

Unlike credit cards, the interest paid on a mortgage or any loan tied to a mortgage is fully tax-deductible. Interest rates are usually lower as well. For consumers looking to save money and get out of debt, these benefits are very attractive.

Debt Consolidation

One option for consumers who are in debt and want to get out of it as quickly as possible is to apply for a debt consolidation loan. The purpose of a debt consolidation loan is to pay off other existing accounts, such as credit cards and auto loans, and then have only one debt payment to consider each month. Consumers who opt to do this need to be dedicated to getting out of debt, because there is always the temptation to use the loan to spend more money. If that happens, the consumer will have both the debt consolidation loan, credit cards, an auto loan and more to pay each month.

The interest on a debt consolidation loan may be deductible, depending on how the borrower chooses to obtain it. If he or she uses a cash out refinance or home equity loan to pay off debt, there will be a greater tax savings than other types of loans. A secured loan, meaning one that is guaranteed by the borrower’s house or another valuable personal possession, is typically easier to qualify for because there is less risk to the lender. By contrast, a non-secured loan may be more difficult to get, but it is not impossible. Consumers need to be willing to put time into researching their best options for either type of loan.