Has high-interest debt caught you up? The more you delay in clearing your dues, the more harm you will do to your credit score and borrowing ability. Without further ado, you should come up with a strategy that helps pay off your debts. There are two popular methods, such as debt snowball and debt avalanche, but they both sometimes do not seem to be so affordable and suitable.

 Thankfully, refinancing is a solution or perhaps a better solution. You can take advantage of low mortgage rates by adding your unpaid debts to your current mortgage, but this might have dire consequences.

It is not always a bad idea, but a lot of factors need to be taken stock of before you think of refinancing your existing unpaid debts. Ask the following questions before you finally arrive at a decision.

Are you actually willing to imperil your house?

At this moment, your debts are unsecured, which means your lender cannot repossess your house in case you make a default, and this is one of the reasons why these debts carry higher interest. If you add these loans to your mortgage, they might increase the size of monthly instalments.

Chances are you struggle to keep up with payments, and if that happens, your house will be at risk. It is not necessary that the payment size will dramatically increase, but it makes sense to take it into account; after all, your house is on the line. Not until you are financially in a good place to handle those payments should you consider refinancing.

How much benefit will you receive in interest payments?

Do not jump the gun just because you are eligible to qualify for refinancing your current high-interest debts. Although refinancing will lower your monthly interest payments, do not forget that the amount will be repaid over a long period of time, so you will end up paying equivalent to or perhaps more interest in total. You should use an online calculator to understand the scenario.

Suppose you have a no guarantor loan from a direct lender worth £10,000 at 15% for three years that you manage to refinance at 9% for 20 years. The interest you will be paying is £16,052.  However, the total amount will be worth £12,314 when you do not refinance.

What will be the additional costs?

When you refinance your existing debts, you will pay some fees upfront. Bear in mind the fees that you will pay off vary by lenders. Your credit score and financial condition will determine the interest rates. Home equity loans usually carry high-interest rates even if your credit score is good. You can avoid additional costs by shopping around.

The fees could be a few hundred pounds, and it will also include loan origination fees and processing fees. Do not forget that a lender will check your credit rating. If you have already fallen behind on payments, the higher interest rates will be imposed.

In case you think you need loans with no guarantor to meet any emergency expenses, you will get them at higher interest rates.

Are you sure that the housing market will keep growing?

Refinancing allows you to borrow against the equity you build in your house, so the equity sum must be higher than the value of your debt. Under normal circumstances, lenders expect you to have built more than 20% of equity to mitigate their risks, even if your refinancing amount is less than this value.

Even though you have built good equity in-house, refinancing might not always be a good idea. You can be deeply stuck in your debt during the house crisis. Because of a sudden drop in the prices of houses, you will end up owing more than the actual worth of your home.

Will you go into debt again?

After refinancing your loan, you might be paying down the instalments on time, but it is likely that you will come across some emergency again, and you need to borrow money for it. If you actually have to borrow again, there is no point in refinancing your existing debts.

You should try to create a budget and set aside money for unforeseen expenses so you do not have to keep borrowing time and again. At the time of clearing the dues, keep tabs on your costs so your budget has some room to repay for your unexpected expenses. Otherwise, you will fall into debt once again, and this time, it might be quite difficult to get out of them.

The bottom line

Refinancing may be a great way to tackle your high-interest debts, but it also has some risks. You should carefully weigh up the upsides and downsides before making any decisions.

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