Most households have multiple loans (home loan, car loan, personal loan) and credit card debts, not to mention the other bills that come in regularly. These loans, debts and bills have to be paid on the due date each month.Keeping track of the dates to be paid by and having to budget to ensure that sufficient funds are available to meet these payments can lead to stress.
Whilst not much can be done about the bills, it might help to have at least all the loans and debts rolled into one loan with one repayment amount on one specific day of the month. This is done by way of refinancing the home loan to include all other short-term loans and debts.
The advantages of doing this are:
- One loan repayment per month – a set amount on a set date.
- Saving money by paying the high interest loans (car loans, personal loans) and credit card debts at the lower home loan rate.
- Using all or part of the disposable income, released by the refinance of the high interest/short term loans into the low interest home loan, to pay off the home loan sooner.
Of course it has to be remembered that the short term loans are being paid off over a longer period of time. However, the effect of this can be minimised by increasing the payments on the home loan as per point 3 above.
Here is an illustration of how refinancing works.
Current home loan repayment per month $1,200
Current car loan repayment per month $ 800
Current personal loan repayment per month $ 400
Current credit card repayments per month $ 400
Total monthly repayments $2,800
After refinancing the car loan, personal loan and the credit card balanced into the home loan, the monthly repayment for the new home loan is $1,650. This leaves the household with an additional amount of $1,150 in disposable income every month. However, the smart thing to do would be to use most of it, if not all of it, to increase the home loan repayments so that it is paid off sooner. (Please note that the figures used are for illustration purposes only and is not an indication of an actual scenario). It is important for each household to do the sums to see what can be saved by undertaking the refinancing process.
Other factors to consider prior to refinancing are:
- Are the costs of refinancing prohibitive?
- Is the new interest rate competitive?
- Is the new loan product flexible enough if plans change in the future?
All of the above information can be readily researched over the internet or obtained by talking to an independant mortgage professional.