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Refinancing your mortgage to consolidate debt

Combine your debts into one payment only after weighing the risks.

Updated

Since interest rates on some debts, like credit cards, can be extremely high, many homeowners choose to consolidate their debts for more affordable and manageable repayments. But be mindful of the costs and risks of a debt consolidation refinance, and make sure it aligns with your long-term financial goals.

What is debt consolidation refinancing?

Debt consolidation refinancing combines your existing debts and mortgage into a new home loan, ideally with a lower interest rate than your other debts. This gives you one monthly repayment instead of several. This strategy makes financial sense when the cost of the new loan, including fees and interest, is less than what you’re currently paying on all your individual debts.

What types of debts can I consolidate?

Debt consolidation loans usually consolidate unsecured debt, but can vary widely. A few common types you can consolidate include:

  • Credit cards
  • Car loans
  • Personal loans
  • Payday loans
  • Medical bills

How a debt consolidation refinance works

A debt consolidation refinance is a secured loan that taps into your home’s equity and uses your home as collateral. You refinance your existing mortgage for a loan amount that is higher than what you owe. You take the difference between the two loan amounts in cash to pay off your debts.

You’re left with one debt — a new mortgage with a higher loan balance than the original one.

Pros and cons of a debt consolidation refinance

While paying off most of your debts with a mortgage refinance can be an attractive option, there are distinct benefits and risks.

Pros

  • Convenience. Refinancing with a debt consolidation mortgage allows you to repay all of your debts with one manageable repayment. No more juggling multiple due dates.
  • Lower interest rate. Many unsecured debts, such as personal loans and credit cards, have high interest rates. By consolidating these accounts into your mortgage, you may secure a lower interest rate for all of your debts.
  • Lower monthly payment. With one monthly payment and a potentially lower rate, your monthly repayment amount might be less compared to repaying each loan individually.

Cons

  • Fees. You may have to pay fees to close out your existing loans, on top of other expenses like closing costs — usually 2% to 5% of the loan amount.
  • Takes longer to repay debts. Since you’re spreading out the repayment period of all your debts over a longer period of time, you may end up paying more in interest than if you had paid them off sooner. Crunch the numbers and make sure consolidating is to your benefit.
  • Longer loan term. A mortgage refinance can reset your loan term. So even if you only have 20 years left on a 30-year mortgage, a refinance can reset your loan term back to 30 years and cost you more interest.
  • Foreclosure risk. If you fail to make your new, higher monthly mortgage payments, the bank could foreclose on your house.

How to decide if a debt consolidation refinance is right for me

  1. Identify your needs. Consider your lifestyle and borrowing needs. What features do you need from your new lender? Do you have a contingency buffer in place to cover your payments if you lose your job? Do you have the discipline to manage the payments?
  2. Speak to your lender. Contact your existing lender to see if you can negotiate the interest rate offered with your current mortgage. This may ease some financial pressure from your mortgage, which may allow you to focus on servicing your other debts. However, if it’s a different loan type or features that you’re after, it may be time to refinance.
  3. Calculate the refinancing cost. Take a look at your loan agreement to see if you have any early repayment fees. These charges are penalties for closing your loan early, especially if you refinance with a different lender. Then, calculate the costs to refinance, including origination fees and application fees.
  4. Compare refinance programs. Borrower eligibility and refinance fees vary by lender and loan program. Shop around to compare loan types and fees for debt consolidation refinances from multiple lenders. You may also consider speaking with a mortgage broker to find the best type of debt consolidation loan for you.

Bottom line

Refinancing your home loan to consolidate debts is a step that should be taken with caution. Even though the potential savings you can make seem enticing, make sure to offset the savings with the costs of refinancing.

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