7 Reasons to Consolidate Debt with a Mortgage Loan

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Bryan Dornan

Refi Guide Founder

For years, many Americans have decided to save on their credit card bills and other debts by refinancing their mortgage and pulling out equity. For decades Americans have turned to the mortgage in an effort to save money with lower payments through the debt consolidation loan opportunities afforded to homeowners in this country. Consumers that have a mortgage on their home have found one of the best ways to consolidate debt is through a traditional refinance transaction.

This can be an excellent choice for people who are stuck paying high interest debt bills every month. If you are thinking about refinancing a mortgage to consolidate your debt, consider these many benefits:

#1 Mortgage Interest Rates Are Still Low

After the 2016 election, interest rates did start to rise, as many investors believe that the housing and mortgage industry will heat up in 2017. While the rates did spike a bit, qualified borrowers can still can get a refinance mortgage in the area of 4%.

If you got your mortgage a decade ago, you easily could still be paying 5% or more on your mortgage. Now is a good time to refinance to consolidate your debt, as you will probably pay a much lower interest rate than what you are paying on credit cards or student loans.

You should be aware that if the economy does heat up, interest rates will continue to rise. At that point, mortgage rates could be too high to make refinancing a good deal. So, you may want to act soon.

#2 Make One Payment Per Month

If you have credit card debt, you probably have several accounts that you have to pay each month. Paying several bills every month is inconvenient. Plus, you run the risk of paying late on one of the bills and having a late fee.

With a mortgage refinance, you can pull cash out of your home and make a payment on all of your debts just one time per month. This is more convenient and will save you interest as well.

consolidate debt

Find Out if a Debt Consolidation Loan or Mortgage Refinance Can Help you Save Money with Lower Monthly Payments.

#3 Write Off Mortgage Interest

With few exceptions, you cannot write off credit card interest on your taxes. A massive advantage of mortgage interest is that you can deduct your interest payments each year from your income on your tax return.

For many Americans, the mortgage interest deduction saves them several thousands of dollars on their annual tax bill.

If you refinance your home and pay off your debts with your home equity, you will be able to write off most of that interest. In most cases, Americans are unable to deduct the interest on unsecured credit cards, but that often changes when consumers refinance credit card debt into a home loan.

#4 Paying Off High Interest Debts Helps Credit

If you have $10,000 of high interest credit card debt, this is lowering your credit score.

You can quickly increase your credit score if that debt is rolled into your refinanced mortgage. This is a much lower interest rate debt, and mortgage debt is generally seen as ‘good’ debt by the credit bureaus, as long as you pay your mortgage on time. Getting a debt consolidation loan for bad credit can be challenging, but speaking with subprime and FHA mortgage companies is a great place to start. Debt consolidation loans and bad credit are often synonymous.

#5 Save on College Loan Debt

Credit card debt is not the only debt that many Americans have: Many also have thousands in college loans that they are paying on every year.

With today’s interest rates for mortgages hovering in the 4% range, you should be able to save several percentage points in many cases on college loan debt as well. Refinancing student loans into a mortgage has become one of the most popular choices for millennials drowning in debt.

#6 Shorten Loan Term

Some people decide to shorten their mortgage loan term when they refinance. Some people may decide to go from a 30 year loan to a 20 year or 15 year loan. A few people may see little increase in their payment, if they are refinancing a much higher rate mortgage.

Others will see higher payments each month, but you will be paying much less interest over time if you shorten your mortgage by 10 or 15 years. Paying less in interest over the years leads to better financial security as you approach retirement.

#7 Pay Set Payments Over Time

If you refinance your debts into your mortgage, you will be able to make fixed payments on your debt over a long period of time. Rather than paying your revolving balance each month, you will be paying a fixed amount.

Considerations

Should you do a cash back refinance on your mortgage to consolidate your debts? For many Americans, it makes sense; you can greatly decrease the interest you are paying, compared to a credit card. Many people will save at least 10% in interest each year with a refinance mortgage loan.

However, there are situations where you may want to reconsider doing the refinance to consolidate your debt. If you are close to paying off your home, you might want to rethink adding to your mortgage balance. This is especially pertinent if you are nearing retirement.

Further, consolidating debt only makes sense if you are disciplined. Some people use the opportunity to consolidate their debts as a chance to run up all of their credit cards again on things they don’t really need.

If you do that, you end up in the same situation again, and even worse: Now you have your previous credit card debt on your mortgage, plus your new credit card bills. If you don’t pay your mortgage, you lose your home. So, doing a mortgage refinance to consolidate debt can be fine as long as you have the discipline to not continue to run up new debts.

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.