Does it make sense to go through with mortgage debt consolidation, or to take cash out of the house to consolidate debt? If one is sizing up the pros and cons of choosing this form of financial relief, what’s the best way to think about the procedure? The best method is to size up the benefits, then look at the negatives, and determine how these factors break when it comes to your specific situation. After going through the numbers, you may find it isn’t something you can do that significantly resolves your problem, or that a consolidation does in fact it help you out quite a bit.
The first benefit of a mortgage debt consolidation is a significant improvement in monthly cash flow,
coming from the lower payment that should result from a lower interest rate offered by the loan you apply for. Of course, your credit should be decent enough to permit you to qualify for low interest rate refinance product, and conditions in the market should be such that interest rates in general are lower than what they were at the time you purchased a home (the latter is the main situation that motivates home owners into refinancing in the first place).
It is this low payment, and the equity available in the home to secure a consolidation loan, that creates the likely possibility that available loan proceeds can be used to pay off the balances of your credit cards and auto loans, or other higher interest personal credit. A quiet advantage of transferring unsecured debt into mortgage debt is that mortgage interest is tax-deductible in the US, while credit card interest is not. This makes it easier to pick up a larger tax refund every year. And the third major benefit of consolidation is the simple convenience of being able to make just one payment, rather than multiple payments each month to settle your major bills.
The biggest drawback to mortgage debt consolidation, for those paying attention to the total amount of money being paid out, is that the absorption of unsecured, short-term debt into a mortgage balance has the effect of turning that short-term loan into long-term debt. The improvement the household gets in cash flow through the lower payment, translates into a much larger total payment across the term of the mortgage on the same principal. The second negative, taking unsecured debt and making it secure debt, puts you in potentially greater jeopardy should you have financial difficulties again, since the lender may take your home in foreclosure if you default on the debt!
You’ll have to weigh the benefit of the simpler, monthly payment, against the long-term loss of savings, and honestly assess whether you can board the payment and resist the habit of running up high personal loan balances again. If the risk is tolerable or manageable, a mortgage debt consolidation loan may indeed represent the best solution to alleviating you of financial stress.