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Is It Worth Consolidating My Debts

Debt Articles > Article: Is It Worth Consolidating My Debts

If you find yourself buried in credit card or other unsecured debt, you may find that consolidating your debts into your mortgage by refinancing, taking out a second mortgage, or borrowing against a line of credit home loan is a better solution. In many cases, debt consolidation is an excellent way to get your debts under control and establish a stronger financial foothold.

When deciding whether debt consolidation is the right strategy for your personal financial situation, there are many factors to consider. First, you need to crunch some numbers. Calculate the total amount of your current monthly debt payments. Next, determine how long it will take you to repay the unsecured debt at your current rate of repayment. For example, if you are only making the minimum monthly payment on a credit card, you might find that repaying the debt at that rate will take longer than it would take you to repay a traditional 30 year mortgage.

Consolidating unsecured debt with high interest rates into a refinanced mortgage with a lower interest rate can greatly reduce your total monthly payments. The money you save each month can then be used to pay off other debts quicker, or be applied to your mortgage payment to reduce the principal on the loan.

 


Once you've determined the costs and repayment time for your unsecured debt, compare these calculations with the added amount to your monthly mortgage payment and the length of time it will take you to repay the extra debt on your mortgage over the life of the new mortgage loan. You might discover that consolidating your unsecured debt into your mortgage will save you thousands in interest and greatly reduce the length of time it takes you to repay these unsecured financial obligations. Conversely, you might find that consolidating your debts will actually cost you more money and time. That is why taking the time to calculate the repayment costs and times is so essential. There are many helpful mortgage and loan calculators available on the Internet to help you calculate your costs and repayment times.


Next, you must assess your finances and spending habits. Where do you spend your money? Are you living beyond your means? Do you control your money with a budget? Do you stick to your budget? If your high unsecured debts were a result of spending beyond your means, you must adjust your budget to prevent yourself from landing in the same situation in the future.
Other points to consider:

How long do you plan to be in your home?

If you are planning to sell your house in the near future, consolidating your unsecured debts into your mortgage may not be your best strategy. If you intend to sell the property, you must ensure that you have enough equity to pay the realtor commission and closing costs on the property, as well as the costs associated with purchasing the new home.

Is the debt worth consolidating?

Not all unsecured debt is worthy of consolidation. For instance, if you only have a few months of payments left on a financial obligation, rolling that debt into a mortgage is probably not a great idea.
Will I benefit from tax advantages?
The interest you pay on a mortgage is tax deductible, whereas the interest paid on most credit cards or other unsecured debt is not. These tax benefits could potentially save you even more money.

Pros of Debt Consolidation:

  • You can generally receive a lower interest rate on a mortgage loan than the interest rate you pay on unsecured debt.
  • Debt consolidation allows you to make one monthly payment rather than multiple payments.
  • The total monthly cost of the consolidated loan will most likely be less than the total monthly payments you pay on your unsecured debt.

Cons of Debt Consolidation:

  • Consolidating debts into your mortgage will increase the amount you owe on your home, leaving you with less equity
  • If you default on your mortgage, the lender can foreclose on your home.
  • You must have enough equity in your home to cover the current mortgage plus the unsecured debts you wish to consolidate.
  • If you have not addressed the issues that led to your debt problems in the first place, you may be inclined to use your newly paid off credit cards to charge more purchases.

In many cases, debt consolidation is an excellent strategy for controlling your debt and securing your financial future; however, the decision to consolidate debts into your mortgage must be made only after careful consideration, calculations, and planning. A financial professional can help you determine whether debt consolidation is appropriate for your unique financial situation.

 

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