Refinancing Your Mortgage For Debt Consolidation
If you’re thinking about turning to your mortgage to help you manage your debt payments, you are definitely not alone. Refinancing for the consolidation of debt is a very common practice among homeowners.
Refinancing to pay off debt will get you a new mortgage loan, but with a lower interest rate than your current loan. This allows you to roll your debt payments into your mortgage payments, which can really help if your debt payments carry a high interest. As well, consolidating your debt with a refinance will allow you to put more money toward the principal of your home.
The Benefits of Refinancing For Debt Consolidation
As far as your credit score is concerned, refinancing your mortgage can actually help to improve it. Consolidating your loan actually adjust your debt ratios to your favor, thereby increasing your score.
A better credit score can assist you with future mortgage financing, as well as giving you the leverage to get better terms on any other borrowing you do, such as another credit card or loan. What you save by getting a better rate can be put toward activities that can further boost your credit score, or increase the amount in your savings account.
Not having to make payments to multiple companies is yet another benefit of consolidating your debt with a refinance. And you may also enjoy a lower monthly payment if you extend your loan’s terms.
Tax deductions are another benefit of consolidating your debts with a refinance. Because your mortgage interest is tax deductible, anything rolled into it, such as your debt payments will also become tax-deductible.
The Disadvantages of Refinancing To Consolidate Debt
For all of its many benefits, refinancing your mortgage with the purpose of consolidating your debt is nothing something that suits everyone. Much care must be taken in order to ensure that the benefits continue to outweigh the risks.
Rolling your debt into a refinance changes the nature of that debt from unsecured to secured. This means that your monthly payments become even more important to make on time, which can ultimately put your home at great risk if making payments becomes troublesome.
Consolidation can also mean that it takes longer to pay off your debts than you originally thought it would take. In spreading your debts over the longer term of a loan, your payments may be easier to take on a monthly basis, but they can also end up costing you more in interest than you may have paid had you kept them separate from your mortgage payments.
And should the value of your home drop below what you owe, you may find yourself with far fewer options than before, being essentially trapped in your financial situation for an undetermined period of time, waiting for an unpredictable housing market to improve.
Careful Planning Is Key
When deciding whether or not to refinance your mortgage to consolidate your debt, the most important thing to be as sure about as you possibly can is your ability to make your payments on time for the life of your loan, as this could ultimately determine whether or not you are able to remain in your home.
The acquisition of debt often happens over time, and is a result of non-desirable financial habits. Does this apply to you? Thinking about how your debts came to be, and then deciding if this is something that can be changed is key to altering your habits and preventing future debt.
In line with bad financial habits is the perception of using your mortgage to consolidate your debt. Try and not fall into the common perception that your home is a financial safety net. Taking this route should not be seen as the means to max out your credit cards a second time.
In the world of debt consolidation, there are many options which can help you that may present far less risk than putting your home up as collateral. Ensure that you’ve explored as many options as possible so that you can make an informed decision about your debt reduction.
Guest author Tony Caro writes on a variety of topics. He is particularly well-versed in writing about refinance home mortgage options. You can also find Tony on Google.