Refinancing your home loan may sound tempting and a good option to ease your current financial situation. However, even if you get a momentary relief and you can dispose of the surplus on you income for other expenses, you may find yourself in a debt trap in the near future. One from which it may be too complicated to escape.
Many people refinance their home loans in order to reduce their monthly payments and thus, provide some ease to their income. But later, they incur in new debt or market conditions turn their home loans more burdensome and they can not afford the monthly installments. Eventually they default on their home loan or other debt. This has terrible consequences on their credit score and could lead to bankruptcy among other costs.
Variable Rate Vs. Fixed Rate
Usually in order to reduce the amount of the monthly payments, people refinance their fixed rate mortgage loans with a new loan with variable rate. Though variable rate loans have lower interest rates, the rate changes according to market conditions and if the situation worsens, then the monthly installments may become unaffordable.
Thus, when refinancing you should always contemplate the possibility (that a variable rate implies) that your loan installments will vary with time. If you can not cope with those variations you should stick to a fixed interest rate that will keep your monthly installments unchanged through the whole life of the loan.
Higher Interest Rate
Refinancing for a higher interest rate loan in order to get longer repayment programs and thus smaller loan installments, may provide some relief in the short time but you need to consider that it will raise the amount of your overall debt and compromise your ability to get further finance in the future.
A higher debt exposure will limit your possibilities of getting a new loan if you need financial assistance in the future. It is sometimes better to make some sacrifices in order to keep the original repayment program and maintain the amount of the monthly payments in exchange for being able to request a loan if something unexpected happens.
No Further Loan Spreading Possible
After refinancing for a longer term loan and getting a lower monthly payment, you probably will not be able to refinance your home loan again and thus, if you do not do your math carefully or if your financial situation worsens, you will not be able to resort to refinancing to reduce your monthly payments again.
So, if you currently can cope with your monthly payments even if you are a bit tight, it is better to keep your present mortgage the way it is and request a personal loan for other expenses. Refinancing can make a larger portion of your debt more costly just to afford something that you could finance by other means. And, unless you refinance for a lower interest rate or the same interest rate but a longer repayment program, it is better to keep your current mortgage and resort to other sources of finance if possible.
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