Ways to Obtain Financial Security in Today's Economy
In today’s economy, many families and individuals are concerned about achieving financial security. This can be especially important for those individuals who currently have a high debt load and are seeking a way to reduce their debt and the payments required to sustain it. In addition, many individuals and families are seeking ways to improve their credit score in order to enable them to obtain less expensive loans for major items, such as cars or home improvement projects. For homeowners, one of the best possible tools to obtain financial freedom can be using a refinanced home loan to eliminate other debts that have less attractive terms.
Controlling the Monthly Payment Burden
For many persons, the most obvious part of their debt is the monthly payments they have to make for their credit cards, cars, and home loans. Having an unnecessarily high monthly payment can harm the borrower in several ways. The most common difficulties include the following:
• High monthly payments reduce the individual's purchasing power.
• A high credit card debt load can reduce an individual’s credit rating, making it difficult to obtain important loans.
• The monthly payments on high interest debts usually only see a fraction of the borrower’s payment going to reduce the loan principal. The rest of the payment is simply wasted from the viewpoint of the borrower.
• The higher the homeowner’s monthly payments are, the more likely a misfortune such as an auto accident can result in the borrower being unable to pay one or more bills, which can have a negative impact on his or her credit rating.
Consolidating Debts via Refinancing
Consolidating all of the individual’s debt into one loan can have a number of advantages. In addition to reducing the interest on their current debts, it can also allow the borrower to go from paying several separate bills to making a single monthly payment, which can simplify his or her financial planning process. One of the best ways to handle this is for a homeowner to refinance their home. Among the options for refinancing your home loans are a variety of ways to reduce or eliminate other debt, improving both the individual’s ability to save money and his or her credit rating.
Eliminating Credit Card Debt with a Refinanced Home Loan
Due to its high interest rates, credit card debt is one of the primary sources of high monthly payments. This is especially true if an individual has missed one or more payments, which can often lead to a dramatic increase in a card’s already excessive interest rate. Among the better financial options for refinancing your home loans is the decision to roll the credit card debt into the refinanced loan. Essentially the homeowner refinances the loan and then uses some of that money to partially or wholly pay off the credit card debt.
There are a number of advantages to this strategy. The first and most important is that a refinanced home loan will enjoy a far lower interest rate than a credit card account will. In 2013, average credit card rates were nearly 15 percent and many credit card accounts had much higher interest rates. In comparison, many refinanced home loans have interest rates below five percent. When combined with the long-term nature of home loans, this can dramatically reduce the borrower’s monthly payment.
These savings can be used in a variety of ways. The homeowner can take advantage of the lower bills to avoid needing to use credit for many short-term purchases or simply pay off the home loan in a shorter period of time. In either case, the reduction in the borrower’s monthly costs will improve his or her budget and credit rating alike.
Additionally, the borrower’s credit score can be improved by reducing his or her credit card balances. This strategy can dramatically improve the individual’s credit score when compared to borrowers that have a large amount of credit card debt. This can help the borrower obtain favorable terms if he or she decides to take out a later loan for a specific purpose.
Finally, the borrower can use his or her now low credit card balances for emergency purchases. This is important as in many cases, attempting to obtain a new loan or credit account can actually damage the applicant’s credit score, regardless of their previous history. By keeping the credit card accounts open, the homeowner can maintain a financial barrier against emergencies without the potential impact trying to obtain new credit card accounts would have on his or her credit score.
Refinancing a home loan can be an excellent tool to reduce the homeowner’s monthly debt burden and position them to increase the security of their financial position. With interest rates for home loans at historic lows, refinancing is one of the best tools currently available to homeowners seeking to position themselves to obtain financial freedom in today’s economy.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.