Is refinancing your mortgage to consolidate debt a good idea?
If you have lots of high-interest debt, the monthly costs can overwhelm your budget. For some, the best road out of this situation is debt consolidation. Debt consolidation pays off your high-interest debt with one, lower-interest loan to save on interest payments.
How debt consolidation works
Debt consolidation should make your debt payments more affordable each month. High-interest debt typically comes from unsecured borrowing sources, like credit cards and personal loans. “Unsecured debt” means the lender has no collateral to recoup losses if you default on the debt. (Unlike a mortgage, which is “secured” by your home.) It’s easy to get in over your head with multiple high-interest payments going to various lenders each month, especially when you have a lot of credit card debt. Consolidating your debt by rolling your outstanding loan balances into a lower-interest mortgage can simplify matters and save you a lot of money.
What is a debt consolidation refinance?
The goal of consolidating debt is to lower your monthly borrowing costs. And if you can roll all your high-interest debt into a low-rate mortgage refinance, it’s one of the best ways to save money on your total debt payments. Even with today’s mortgage rates, you can use a mortgage to pay off credit card balances that are charging you 18% to 25%. Homeowners who want to consolidate debt often use a cash-out refinance. This kind of loan uses your home equity — that’s the part of your home’s value you have already paid off — to generate your “cash out.” You’ll be increasing your mortgage balance to provide the cash. In a perfect world, this creates lower monthly payments compared to your existing debt load. This strategy could leave only one remaining loan to pay off: your mortgage, which should have a low interest rate compared to your credit card accounts.
Remember, you still owe the money
With any type of debt consolidation loan, the borrower should exercise caution and be disciplined with repayment. That’s especially true with a mortgage or home equity-backed loan, which could put your home at risk if you’re unable to make payments. Borrowers sometimes get into trouble because when debt is consolidated, their prior credit lines are usually freed up. It’s possible to charge those lines to the max and be in debt trouble all over again. Remember, consolidation does not mean your debts have been “wiped out.” They’re just restructured to be more manageable. The real goal is to be debt-free; a refinance or loan is just a means to that end.
Your next steps
Debt consolidation can be a legitimate road to debt freedom for careful borrowers. Please do not hesitate to reach out to our team to evaluate if a debt consolidation loan is right for you.