Using a Mortgage Loan for Debt Consolidation

Cash out refinance transactions for debt consolidations is a popular mortgage transaction.  Cash out refinances represents a large portion of mortgage refinance transactions each year.  For consumers that own a home and have a fair amount of consumer debt, a cash out refinance for debt consolidation purposes is well worth considering.

Sometimes a person can get into debt problems without much effort at all.  Perhaps you have even experienced credit problems and are showing various signs of damaged credit do the debt overload.  If you are willing to be disciplined, in a serious fashion and you own a home, one way out may be a cash out refinance to consolidate these debts.  This may help you solve your credit and debt situation despite some of the inherent risks involved with such a home loan.

It may be possible to refinance your mortgage that you currently have with a loan amount greater than the existing loan balance.  This is called cash out refinance.  The extra money obtained from the new refinance transaction can be used to pay off other bills and debts.  A cash out refinance for debt consolidation loan gives the home loan borrower money to pay off their existing debt, resulting in just one monthly payment and quite possibly a lot less stress.  With discipline, this home loan makes it much easier to manage your budget since you only have to worry about a single monthly mortgage payment schedule.  This type of refinancing option means you will pay a longer term and subsequently more mortgage interest over the life of the debt.

When applying for refinance for debt consolidation, make sure you explain this to the mortgage lender and loan officer.  During the qualifying process for a refinance, the debt ratios the mortgage lender will evaluate are as if the new mortgage loan is in place.  When this mortgage loan is for cash back to pay off consumer debt the application will not consider the existing payments of the debt being paid off to calculate the debt ratios. 

The three key factors in evaluating your loan request will be the debt ratios, the loan to value and your credit report.  In order to make sure the debt ratios are not excessive, it is important that the mortgage loan application does reflect the debts to be paid off otherwise the home loan application could result in a loan denial for an excessive debt ratio.

When you consolidate various high interest rate debts into one mortgage loan the results can be very attractive and appealing.  With a debt consolidation mortgage, you do not have to pay different interest rates to creditors, or pay your creditors at different times of the month.  A debt consolidation mortgage refinance combines your debts into one loan payment a month, one that you should be more manageable. 

Since mortgage loans are secured by real estate, the interest rate or mortgage rate is generally much lower than that of credit cards and personal loans.  And in most cases, the interest paid on a mortgage is tax deductible.  With discipline, you can now budget better to increase savings or prepay on the new refinanced mortgage and extinguish all of your debt early. 

Be careful; do not use the freedom of lower monthly payments to avoid getting your financial house in order.  Do not increase in your unsecured debt after you consolidated through a mortgage refinance.  Pay strict attention to your financial outlays and use the home loan to improve your financial health.

Benefits of a cash out refinance for debt consolidation include:

The ability to take all different types of high interest loans and combine them into one lower interest mortgage when you enter into a refinance.  This pays off the higher interest debts.

Improves your credit rating by reducing the amount of outstanding debts per account.

Most mortgage loans allow prepayment without penalty, allowing the borrower to have the option of not only consolidating many consumer debt payments into one but also to pay a higher monthly mortgage payment if they choose and reduce the total debt early.

By paying off debts that may have been outstanding, you stop and eliminate debt collection activities, foreclosure, bankruptcy, and other potential negative actions that affect your overall credit status.

The process to get a debt consolidation mortgage is fairly simple.  Research and shop around for repayment plan that meets your budget and risk, and find the lowest mortgage rate and closing costs that you can.  Be cautious before signing anything and make sure you understand all the repayment terms, mortgage rates, and costs of the refinance transaction.  Use the mortgage calculators to evaluate the mortgage rates and mortgage payment options. 

Using a cash out refinance mortgage for a debt consolidation can make sense, and help overcome severe debt problems, but it does result in higher interest and higher fees.  It will take discipline to make sure the new payment amount is handled in a timely fashion.  You will have a longer mortgage term and pay more over the length of the loan.  It is often smart to restructure your debt this way, but this does result in a larger single debt amount.  For this reason it’s smart to investigate shorter-term mortgage options to try and avoid paying a larger amount of money over time.