Reason #1 to Refinance: Consolidate Debt
In last week’s blog post we gave a brief overview of what refinancing is and why you might want to refinance your mortgage. In the next several posts, we’ll take a more in-depth look at the individual reasons you might want to refinance and when it makes sense. This week we’ll start with consolidated debt.
What is Debt Consolidation?
Debt consolidation is a type of debt refinancing. It’s when you take out a loan to pay off other debt that you owe. This is usually done when you have higher-interest debt, such as credit cards and unsecured lines of credit.
You can take out a persona loan to consolidate debt, but if you’re looking for the most competitive interest rate, you may be better off refinancing your mortgage and taking out a brand-new mortgage. Why are mortgage rates more competitive than personal loan rates? The reason is simple.
A mortgage is secured by a valuable asset that’s likely to appreciate in value (your family home), while a personal loan usually isn’t secured by anything. This makes a personal loan riskier for lenders.
What if you aren’t able to pay back the personal loan? The lender really has no recourse. It could be quite tough for the lender to recover the money owing. Meanwhile, if it is secured by your home, the lender could simply sell your home to recover the money owing to them.
Can I Consolidate Debt with My Mortgage?
There are costs involved when it comes to consolidating debt. The good thing is that you don’t need to necessarily pay them out of pocket. The appraisal and legal costs of a mortgage refinance (about $1,500 combined) can often be added to the new mortgage balance.
You must have enough equity in your property to refinance your mortgage. You need to have at least 20 percent equity in your property based on the current market value (how much it could sell for today). If you don’t have at least 20 percent equity, you can’t refinance. It’s as simple as that.
Another reason you might not be able consolidate is due to a low credit score. If you missed some payments or your credit utilization is high (you’re using more than 35 percent of your available credit), you might not be able to refinance in that situation either, as lenders often have higher minimum credit scores in order to refinance.
Is Consolidating My Debt Worth it?
Determining whether it’s worth consolidating your debt from a numbers standpoint is pretty easy. You look at the interest rates of your existing debt and the new interest rate of the mortgage. Factoring in the refinance fees and cost, if you come out ahead after the refinance, then it’s worth it.
For example, if you have $70,000 in credit card and unsecured line of credit debt at 19 percent and eight percent, respectively, and you can roll it into your mortgage, and the only setup cost is the legal fees and appraisals, that’s probably a good deal. However, if you’re going to face a $30,000 mortgage penalty, it’s probably not such a good idea.
The Bottom Line
This is just the first reason to refinance your mortgage. If you’re still on the fence about whether to refinance, speak to our mortgage experts. We can run the numbers for you to help determine if it would be beneficial.