My Perfect Mortgage
Is Refinancing for Debt Consolidation A Smart Financial Move?
5 minute read
December 9, 2021

A personal financial crisis is sure to turn your life upside down. 

If you don’t take the appropriate action, your crisis could linger well into the future. And when that happens, it has the potential to affect other areas of your personal and financial lives.

On the plus side, there are many ways to get relief from your personal financial crisis. A debt consolidation refinance, for example, is one of the best options.

Let’s break down how a debt consolidation refinance works and the benefits it can offer. 

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What is Debt Consolidation?

Debt consolidation is the act of taking out one loan to pay off several others. By doing so, you may be able to take advantage of benefits including:

  • Only one payment to manage. 
  • A lower interest rate. 
  • Opportunity to improve your credit score.
  • Less financial stress.

With all this in mind, there’s another question to answer: What’s the best way to consolidate debt?

While there are many options to consider, a debt consolidation refinance could be just what you’re looking for. 

Reasons for a Debt Consolidation Refinance

With a debt consolidation refinance, you’re refinancing your mortgage while also taking out cash. You then use the cash to consolidate your debt. In the end, you’re left with two payments: your primary mortgage and your consolidation loan. 

Take for example a homeowner with a $300,000 mortgage and a home valued at $500,000. This means they have $200,000 of equity in their home. If they qualify for a debt consolidation refinance, they can tap into the equity to consolidate outstanding liabilities.

The primary benefit of a debt consolidation refinance is the lower interest rate associated with this type of loan. When compared to other options, such as a personal loan or credit card, you’re likely to find that the rate is much more competitive. 

Also, you’re able to kill two birds with one stone by refinancing your mortgage and consolidating debt at the same time.

But is it a Good Idea?

Just because there are benefits of a debt consolidation refinance doesn’t mean it’s the right choice for you. Before you do anything, you need to consider the following:

  • The impact on your budget.
  • Your comfort level with using your home as collateral. 
  • The plan you have in place to prevent yourself from accumulating debt again in the future. 
  • The terms and conditions of your new mortgage.

You can collect an endless amount of information pertaining to debt consolidation refinance loans, but it’s ultimately your decision as to whether or not you proceed. 

It’s a good idea for some, but not others. That’s why it’s critical to research your options with an eye toward your personal situation.

What are the Requirements?

As excited as you may be about a debt consolidation refinance, there are requirements you must meet. Without this, you’ll have to turn your attention to other options.

The primary requirement is available equity in your home. If you don’t have this, there’s no way for a mortgage lender to lend you money. 

Estimate the equity in your home by subtracting how much you owe (and any other home loans) from the current value of your property. So, sticking with the example above, if your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. You can then borrow a portion of this equity to consolidate debt.

If you have enough equity, you should then connect with three to five lenders to learn more about available debt consolidation refinance programs. They can share additional details about the application process, required financial documents, credit score requirements, closing costs, and terms and conditions.

Note: Just because you don’t qualify for a refinance with one lender doesn’t mean you’re out of luck. Contact other lenders to learn more about their eligibility requirements. 

Frequently Asked Questions (FAQs) About Debt Consolidation Refinance

Even if you have experience with this type of loan, you’re still likely to have questions weighing on your mind. The following are some of the most common:

  • How much does a debt consolidation refinance cost? Talk to your lender about this. They can provide you with a list of closing costs to help you better understand how much you owe out of pocket. 
  • How long does the process take? This varies from lender to lender. When refinancing, your lender will order a home appraisal. It can take several weeks or longer for an appraiser to visit your home. 
  • What happens if you don’t repay the money in full and on time? As a secured loan, the lender has the power to repossess your home if you don’t repay your loan. 
  • Does it make sense to refinance your mortgage even if rates are higher? Even if interest rates are higher, it may make sense to proceed if you want to access the equity in your home to consolidate debt. 
  • Are there other options? Yes. You can consolidate debt in other ways, such as with a personal loan or credit card.

Pros and Cons of Debt Consolidation Refinance

The benefits of a debt consolidation refinance include but are not limited to:

  • Lower interest rate (when compared to other options).
  • Opportunity to build your credit score.
  • Potential tax deduction.

Conversely, some of the potential drawbacks include:

  • New terms and conditions, some of which may not be as favorable as your current mortgage. 
  • Foreclosure risk.
  • Closing costs.
  • You may have to pay private mortgage insurance.

Final Thoughts

A debt consolidation refinance may make sense if you can secure a competitive interest rate and have a solid plan for how you’ll use the money. Just remember that you’re putting your home on the line and neglecting to repay what you owe could result in foreclosure.

If you’re interested in a debt consolidation refinance, you’re in the right place. 

My Perfect Mortgage makes it easy for you to get started and to move through the process in an efficient manner. 

As you gather more information, it becomes easier to decide if this approach is best for you, your home, and your financial circumstances as a whole.

Photo by Mikhail Nilov from Pexels

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.