Is It Better to Refinance or Do Debt Consolidation?

If you are drowning in credit card debt and are living paycheck to paycheck, fixing your financial situation is probably high on your to-do list. If you are fortunate enough to own your own home, then you have some options that can help relieve your financial stress. You can refinance your home or consider debt consolidation. Both have advantages, so it's important to know the facts before you decide which way you want to go.

Consolidation Loan Advantage

With a consolidation loan you can consolidate your existing credit cards with one new loan at a lower rate. Consolidation can improve your credit score after it is completed, as it appears on your credit file that you have only one outstanding loan instead of several. You may find that you have too many other accounts to do anything else but consolidate, so it's a good idea to speak to a loan officer or personal banker to see if you qualify.

Refinance Advantage

You can speak with your lender to see if you can refinance and pay off your existing accounts. If you have enough equity built up in your home and your credit score is good, you may save hundreds a month by refinancing. You should look at the different loan repayment options. You may find that a 15- to 20-year mortgage is still a lower payment than all of your credit cards combined.

Fees

To decide which option is best for you, consider the fees involved. Refinancing can cost thousands of dollars in closing costs compared to consolidation loans or programs. Review all of the fees involved with each and decide which makes more sense for your particular situation.

Home Value and Credit

You'll need to figure out whether or not you have enough equity in your home to refinance your other unsecured loans. In a struggling economy where home values have gone down significantly, it sometimes makes it difficult to refinance. Plus, if your credit score has dropped due to excessive credit card use, you may not qualify for a lower rate. For a successful refinance your credit score should be good and you should have enough value in your home to cover the costs of refinancing. A loan officer can help you determine if a refinance is advantageous for your financial situation.

Consolidation by a Debt Management Program

You can consider a debt management program (DMP) if you do not qualify for a refinance or a debt consolidation loan through a bank. This requires that you close every existing credit card but places you in a program that reduces your monthly payments and assists you with becoming debt free within three to five years. Credit counselors work with your creditors to lower your rates significantly and then you make one payment each month that gets distributed through the DMP.