Mortgage Refinancing and Debt Consolidation Loan

How to Refinance to Consolidate Your Debt

If you’re a homeowner and you have significant debt, refinancing might just solve your problems. Mortgage refinancing is a debt consolidation loan option. It’s common practice to refinance a mortgage to consolidate debt. It allows you to get a new mortgage at a lower rate and also pay off your debt. However, you’re not actually paying off your debt. You’re simply moving it from a number of individual lenders and credit companies to a refinance loan. This has both positive and negative affects.

Positive Affects of Consolidating Debt with a Refi
When you refinance to consolidate your debt, you’re taking your existing debt and rolling it into monthly mortgage payments. This can be a positive transfer. If your existing debt is high and has high interest rates attached to it (e.g. credit card rates, car loans, etc.), it’s possible to get a refi with a low rate. It also gets the previous lenders off your back and situates your debt into manageable payments. However, you want to make sure that you can handle the size of the loan you get. You don’t want to repeat your problems with the mortgage refinancing/debt consolidation loan lender.

Negative Affects of Consolidating Debt by Refinancing
As mentioned above, refinancing does

have benefits, but those benefits can get away from you if you don’t do your homework. In order for mortgage refinancing to benefit your debt consolidation efforts, you need to get a loan that you can handle. However, your debt and the remainder of your existing mortgage just might be too much to consolidate. If you do decide to refinance regardless, you’re stuck with huge monthly payments you can’t pay off each month – and the cycle starts again. Also, when you pay off your debt with a mortgage refi, you’re spreading your debt across the length of the loan (e.g. 15 years, 30 years, etc.) which means you’re going to ultimately pay more in interest over the years. So you’re not really paying it off. You’re simply watering it down and spreading it across a longer payoff period but still being charged interest along the way (ultimately costing you more in the long run).

Also, if all your debt is tied up with your new refinanced mortgage, you’ll have to wait a significant period of time until you can sell it at a price that will cover everything. And ultimately if you default on your payments, the lender can take away your home – which is definitely a possible negative affect of using mortgage refinancing as a debt consolidation loan.

Mortgage Refinancing and Debt Consolidation Loans – Is It The Right Choice?
It is perfectly acceptable to refinance your mortgage in order to consolidate your debt. However, you need to make sure that you can handle the new payments and that you’ll be able to pay them for years to come. If you’re unsure about whether or not this is the right approach, research other debt consolidation services and options. You might find one that better fits your needs.