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Mortgage Refinance: Is It Right For You?

There are several interlocking reasons to consider refinancing your mortgage. When rates are low, you can lower your monthly payment and/or the total amount of interest you will pay over the life of the loan. You may also want to take out some equity to finance home improvement projects or pay off other debts.

But as a method of adjusting debt it has some drawbacks that should be considered before making that big step.

One drawback is what was just alluded to: it's a big step. Refinancing your current mortgage loan involves most of the steps required to take out the loan in the first place. You'll need current income statements, past tax filings and an array of other documentation. You'll (usually) be filling out a lot of paperwork, and sometimes paying additional fees.

All that takes time and can cost you a substantial sum of money before the process is complete. You'll want to be sure to run some realistic calculations before making a final decision. Online calculators to help you do that are readily available.

One reason some consider making the effort, though, is almost always a poor one: to pay off credit card and other high interest debt. There are many ways to offload that debt without going through the pain of refinancing your primary mortgage loan.

If you have reasonable credit and some equity, you can get a second mortgage or a homeowner's equity line of credit (HELOC). The rate may be slightly higher, but you will find the effort is considerably less. It also protects you in case of financial reverses. Provided you continue to make the primary payments, if you slide for a while on the secondary you are unlikely to be at risk of losing your home.

The second reason is more fundamental. Rather than continuing to seek a way out of debt by borrowing yet more money, you should first make serious efforts to reduce your dependence on borrowing. Some readjustment of current debt may be a good plan - if you can achieve a lower total outstanding debt, a lower interest rate or negotiate relief from some of the payments.

But borrowing more only adds to your long term problem. This should be a last resort, not the first thing you think of as a way out of your debt problem.

Debt consolidation often leads to merely reshuffling your debt, sometimes adding more interest and making your situation worse. But, if it's coupled with a payment plan that does in fact gradually reduce the burden, while making it possible to meet your obligations, it can be a good plan.

In the end, the only way to know for sure is to objectively examine all your outstanding obligations and research the different plans available. Some combination of debt forgiveness, lowered monthly payment(s) and reduced interest payments is the ideal you should shoot for.

Don't surrender your home in order to deal with a short term problem that can be fixed by other methods.