Consolidating Debts With a Refinance:Pros and Cons

Consolidating debts with a refinance has both advantages and disadvantages. Before doing a refinance, it would be wise to take both of these into consideration before deciding if this is something that is right for you.

Pros of Consolidating Debts With A Refinance

-Less creditors
-Lower monthly payments
-Lower interest rate
-Interest may be tax deductible

One of the major advantages of consolidating debts when you refinance a mortgage is the fact that you won't have as many creditors to pay. Instead of having to pay several creditors each month, you will now only have to pay one creditor. This makes things much more convenient when mailing out your bills or visiting an office to make your payment, as you now only have one place to mail a check to or visit.

Since the term of a mortgage is longer than a credit card or consumer loan, the monthly payment will be much lower. Also, when your bills are combined the monthly payment will be less than the total monthly payments of all the bills added together.

Another factor in why the payment will be lower is due to the interest rate. Interest rates on a mortgage will be much lower than a credit card interest rate or the interest rate you will be paying on a consumer loan.

The interest you pay on a mortgage can also help when it comes to tax time. Interest on mortgages can provide a deduction on your taxes, while interest paid on any other debts have no bearing on your taxes.

Cons of Consolidating Debt With a Refinance

-Harder approval due to larger loan amount
-The possibility of reopening credit cards
-Debt now secured by home

The more you borrow, the harder it is for a refinance to be approved. Lenders typically use what is called an equity ratio to determine things such as your interest rate and how much you can borrow. For example, if you are borrowing $80,000 on a home that is worth $100,000, you will be using up 80 percent of the value of your home. If you are only borrowing $50,000, resulting in only a 50 percent equity ratio, the loan will be approved much easier, and you may even get a lower interest rate.

One thing that seems to cause problems for many people after consolidating their credit cards is the temptation to use them again after they have been consolidated. This leads to problems because now not only do you have to make payments on the money you used to consolidate these bills through your refinance, but you will also have to start making payments to these credit card companies again.

Another thing to keep in mind when consolidating with a refinance is that the bills you are paying off will now be part of what you owe on your home. This means that if you default on your payments, the bank can foreclose on your property.

Taking the time to consider these negatives can help you decide if the positives of debt consolidation are enough for you to consider doing this when you go to refinance. Many people don't think of the cons until later on, and then it is too late for them to do anything about their poor decision.

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