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Mortgage Refinancing and Debt Consolidation Loan

Mortgage Refinancing and Debt Consolidation Loan
Daniel Cohen
UpdatedDec 1, 2010
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    4 min read
Key Takeaways:
  • Review the pros and cons of debt consolidation mortgage refinancing.
  • Examine the risks of turning unsecured debt into secured debt.
  • Plan carefully, so you don't run up debt again after consolidating your current debt.

Mortgage Refinancing and Debt Consolidation Loan

How to Refinance to Consolidate Your Debt

If you are a homeowner with significant debt, refinancing might solve your debt problems. Mortgage refinancing is a popular debt consolidation loan option. A debt consolidation mortgage loan allows you to get a new mortgage, at a lower interest rate, and also pay off some of your creditors. However, you are not actually paying off your debt. You are simply moving it from a number of individual lenders and credit companies into a refinance loan. This has both positive and negative effects.

Positive Effects of Consolidating Debt with a Refi

When you refinance to consolidate your debt, you are taking your existing debt and rolling it into monthly mortgage payments. This can help you in a few different ways. If your existing debt, such as credit card debt, personal loans or vehicle loans, have high interest rates, a lower interest cash-out refinance consolidation will allow you to put more of your dollars towards principal and less to interest. It also eliminates the need for multiple payments each month, as your mortgage payment will now cover the debts you consolidated, too. A consolidation refinance can also lower your monthly payment by extending the term of your loan, allowing you to repay the debt over a longer period of time.

Negative Effects of Consolidating Debt by Refinancing

The benefits of consolidating debt through a refinance can get away from you if you do not act carefully. In order for mortgage refinancing to benefit your debt consolidation efforts, you need to get a loan with a monthly payment that you are very sure you can handle. However, your debt and the balance of your existing mortgage might be so large that it will result in an unaffordable payment. If you do decide to refinance, regardless, you could be stuck with large monthly payments you struggle to pay off each month.

When you pay off your debt with a mortgage refi consolidation, you are turning unsecured debt into secured debt. This places your home at greater risk. Before, if you paid your mortgage but were unable to pay all your unsecured debt, you would be subject to late fees and a possible hike in your credit cards’ interest rates. If you miss a mortgage payment, however, you start placing your home in jeopardy.

While a mortgage consolidation loan can reduce the size of your monthly payments on your combined debts, which can be a good thing, spreading your debt across the length of the loan means you are going to pay more in interest over the years. You are simply watering down your debt, spreading it across a longer payoff period but still being charged interest along the way, costing you more in the long run. If you default on your payments, the lender can take away your home, which is a possible serious negative effect of using mortgage refinancing to consolidate debt.

Also, the more debt you tie up in your home, the greater the chance that you can end up trapped in your home. If the value of your home drops below the amount you owe, your options are severely restricted. Refinancing again is problematic. Selling your home can be a problem, too. If a job change or other life event requires you to move, you do not want to be in a home that is worth less than what you owe. Too many Americans who treated the equity in their home as if it were a piggy bank are now trapped in homes that are worth far less than what they owe on them, facing a series of unpleasant choices.

Mortgage Refinancing and Debt Consolidation Loans — Is It The Right Choice?

A debt consolidation refinance may be a great solution that helps improve your finances. However, due to certain risks involved, you should do so only after careful consideration. You need to make sure that you can handle the new payments and that you will be able to pay them for the life of the loan. You need to think carefully about how and why you acquired the debts you consolidated, making sure that you do not run up new debts that will place you under even greater financial strain.

Remember that paying off your credit cards in a consolidation is not carte blanche to run up your credit card balances again. If you are unsure about whether or not debt consolidation refinancing is the right approach, research other debt consolidation services and options. You might find one that better fits your needs.


BBrad Stroh, Jul, 2014