Refinance for Debt Consolidation

It has become very fashionable in recent years to refinance a first mortgage in order to take out equity which is used to pay off existing debts, such as credit cards. Because of the low interest rates on a new first mortgage, and the (traditionally) 30-year payoff period, the monthly payments on a new loan to refinance a mortgage are typically lower than the payments on one or more credit cards.

If done correctly, the borrower is no longer hounded by creditors and the resulting monthly payment on the new first mortgage is lower than the payments on the credit cards, saving the borrower much-needed cash every month. With all of the borrower’s credit card debt wiped out, the net result is typically an increase in the borrower’s credit rating. Additionally, interest on credit card loans is not tax deductible, whereas the interest on the debt-consolidating home loan is.

All of this sounds good on the surface. However, there are several lurking dangers. First, now that the borrower has a clean credit record and all of his or her credit cards are paid off, the temptation is to begin charging more purchases. Old habits are hard to break, and it is often less than three years before the borrower is deeply in credit card debt once again.

The other problem with a debt consolidation loan is that you have exchanged an unsecured credit card loan for a secured loan against your home. If you are unable to make your credit card payments your creditors may make your life difficult, but if you fail to pay your mortgage payment you could lose your home and everything for which you’ve been working.

Taking out a debt consolidation loan should not be a casual decision. It should be a very careful decision made after weighing all of your options and considering all of the potential consequences.