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Debt Management – Loan Refinancing
By Adam J. Heist
Everyone falls into debt at some point of there life. A lot of these people also get their debt refinanced in order to reduce the interest cost. While if properly worked out this is no doubt a great benefit, but chances are that it is not being worked out as well as it could be. Loan refinancing is a highly complex operation and there are many variables involved. It is important to know what is available and what you are doing in order to get the most out of the deal.

A lot of people opt to have their homes refinanced. By refinancing the home mortgage with either a longer repayment option, or a lower interest rate (or both) you effectively reduce the monthly payment that you need to make. This isn’t so simple though.

If you get a longer term loan you will be indebted for a longer period of time. If the interest rate is higher on the longer period loan, then your monthly payout could be more or less, depending on the intensity o the increments. Only a same term loan with a lower interest rate is the wise option to choose.

You can also do the reverse. If you are looking to end your loan more quickly so that you can be debt free then you have to change your

debt income ratio. By shortening repayment programs you will increase your monthly payments and only a lesser interest rate would compensate for this which is not always possible. Also, by refinancing for a shorter period loan you will be increasing your monthly payment liability so make sure you have enough funds to do this on a regular basis.

The important thing to do is to reduce your overall debt. As home loans carry the lowest interest rates it is usually best to extend the repayment programs even if the interest rate goes up. This way by lowering the installment you will be able to use the surplus saved to repay other, higher interest bearing, debt such as credit cards.

The underlying principle is to exchange your expensive debt for cheaper financial resources.

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