No one likes debt and everyone is always looking for solutions to decrease their debt. There are lots of different options available to reduce your debt. Did you know you can use your mortgage to consolidate some of your debt?
WHAT IS MORTGAGE REFINANCING FOR DEBT CONSOLIDATION?
Mortgage refinancing is when a homeowner renegotiates the conditions of their existing mortgage agreement such as the amount of the mortgage or the amortization period. Debt consolidation through a refinanced mortgage would allow the homeowner to combine unsecured debt with their mortgage.
WHAT DEBT CAN I CONSOLIDATE?
You can use your mortgage to consolidate unsecured debt. Unsecured debt is any debt that is not protected by collateral, co-signers or guarantors. Unsecured debt tends to have a higher interest rate then secured debt because of the risk associated with the loan for the lender.
WHAT ARE THE PROS AND CONS?
Leveraging the equity in your home in order to consolidate your existing debt is not something to take lightly. You want to ensure that you’ve done your due diligence, thoroughly researched and weighed your options with a mortgage professional before making a decision.
Pros of Consolidating Debt with a Mortgage:
The interest rates on your unsecured debt will be lower. The average interest rate for credit card debt is 19%, whereas the average interest rate for a mortgage is 3.14%. Once you combine your unsecured debt with your mortgage your unsecured debt interest rates will decrease to the interest rates of your mortgage which could save you hundreds every month.
Your total monthly payment will be lower. Since interest rates are lower on mortgage debt you will be saving money every month by not paying the high interest rate on unsecured debt.
All of your payments will be in one place. Rather than needing to make individual payments for your credit card, your student loans and any other unsecured debt you may have, you can just make one single mortgage payment. This will not only decrease your chance of missing or forgetting a payment but will also put you in a position to improve your credit score.
Cons of Consolidating Debt with a Mortgage:
In most cases there are additional fees associated with consolidating your debt such as balance transfer fees, closing costs and administrative fees.
When someone consolidates their debt by using their mortgage the terms and conditions of the loan change. This usually means that the amount of time it takes someone to pay off their mortgage is extended resulting in homeowners being in debt for a longer period of time.
Debt consolidation does not correct the root of the financial troubles. If you are going to consolidate your debt you need to ensure you stay on a strict budget in order to avoid being in the same position down the road.
Debt consolidation can be a very smart decision in certain circumstances. Consult with your mortgage broker before making the decision to refinance your mortgage to consolidate your debt. You always want to make sure you explore all of your options and make the best decision for your financial future.