Debt Consolidation Refinancing Your Complete Guide

With American household debt reaching a record-high $14.6 trillion in the spring of 2021, there’s no wondering why so many people are looking into debt consolidation refinancing. 

While it’s not the right choice for every consumer who’s swimming in debt, it could be the perfect opportunity for you to improve your finances and to feel better about your financial future. 

There’s no shortage of ways to consolidate debt.

Let’s look at why debt consolidation refinancing is something you should strongly consider. 

What is Debt Consolidation Refinancing?

You have a mortgage. You also have a lot of consumer debt. 

While it’s okay to keep them separate, it’s not your only option. A debt consolidation refinance loan could be the answer to many of your financial concerns.

The primary goal of any debt consolidation strategy is to reduce your monthly costs. And with a refinance, you can do just that in regards to both your mortgage payment and other debt obligations. 

With debt consolidation refinancing — also known as a cash-out refinance — you borrow more money than your current mortgage balance. For example, if your mortgage balance is $200k, you could borrow $300k and use the difference to consolidate your debts. 

In the end, you’re left with one monthly mortgage payment. 

You’ve eliminated all your other debts through the use of cash via the equity in your home. 

What Types of Debts Can You Consolidate?

Before you decide in favor of debt consolidation refinancing, you must first make a list of your liabilities. From there, you can determine which ones you want to tackle with the cash that you receive from refinancing your loan. 

Some of the most common types of debts include:

• Credit cards
• Home equity loan
• Home equity line of credit
• Personal loan
• Car loan
• Medical bills
• Business debts
• Unpaid and/or overdue taxes

Whether or not you can consolidate all your debts depends on factors such as the equity in your home and the amount of money you’re comfortable borrowing in the form of a mortgage. 

Knowing the types of debts you can consolidate is an important early step. 

How Does Debt Consolidation Refinancing Work?

As complicated as it may sound, debt consolidation refinancing is a relatively simple process. The following are the basic steps you’ll take.

Review the terms and status of your current mortgage

How many years do you have left on your mortgage? What is your interest rate? Is it a fixed-rate or adjustable-rate loan? Are you current on your payments? Answer these questions — among others — to ensure that you have a firm grasp of your mortgage and finances as a whole. 

Make a list of your debts

Not only should you make a list of your debts, but it’s also a good idea to make note of your monthly payment, interest rate, balance remaining, and term (if applicable). This list will help you decide which debts to consolidate.

Taking a look at your credit score is helpful too in understanding your debts, as well as your eligibility for a cash-out refinance mortgage.

Estimate your equity

Your lender will give you the final word as to how much equity you have in your home, but don’t let that stop you from estimating it early in the process.

How much principal have you paid on your current home loan? That will be your equity, or the amount of the property you own. What is the estimated value of your home? This is one factor that determines how much money you can borrow.

Contact a lender

There are hundreds upon hundreds of lenders that offer debt consolidation refinance mortgage products. If you don’t know where to start, My Perfect Mortgage has the tools and resources to match you with the right lender. We can quickly and efficiently connect you with a lender who will guide you through the process and answer your questions.  

Review your offer

Once your home is appraised, your lender will explain how much cash you can access. Remember, you don’t have to borrow all of the money that’s available to you. Review your offer and borrow what you need, based on the debts that you want to consolidate.

Once you decide on a lender, there’s less pressure on you. They’ll manage the entire refinance from beginning to end. You simply need to follow their guidance. 

Pros and Cons of Debt Consolidation Refinancing

Just the same as any type of financial product or service, there are both pros and cons of debt consolidation refinancing. If you don’t understand both the good and the bad, you could end up making a poor decision that affects your finances for years to come.

The Pros

• Fewer bills to pay: When you consolidate your debts, you’re left with fewer bills to pay each month. For instance, if you have a credit card balance, personal loan, and home equity loan, that’s three payments. However, if you consolidate these with your mortgage, you eliminate these three payments in exchange for one. This saves you time while giving you a more clear overview of your finances. 
• Save money by lowering your interest rate: With a lower interest rate, you position yourself to save money. This is why it’s so important to know the rate attached to all of your debts. Debts like credit cards can carry high-interest rates, causing you to have higher monthly payments. With mortgage refinance rates at historical lows, there’s no better time than now to take action. 
• Improve your credit score: Consolidating your debt can improve your credit score, as it lowers your credit utilization ratio. As this number falls, there’s a greater chance of your credit score rising. 

The Cons

• Risk of heading down the same path: Take for example someone who uses a cash-out refinance to consolidate credit card debt. It’s beneficial at first, but only if the same problem doesn’t rear its head in the future. It doesn’t take much effort to rack up another credit card balance. Make sure you solve the root of the problem before considering consolidation. 
• You may not qualify to refinance your home: As much as you want to refinance your mortgage, there’s no guarantee that you qualify to do so. There are a variety of requirements based on your income, credit history, credit score, the value of your home, and equity in your home. A lender can help you understand whether you qualify.
• Mortgage debt is secured against your home: Some debts are secured, meaning there’s collateral involved, while other debts are unsecured. A mortgage is a secured debt, meaning that your lender is legally permitted to repossess your home if you don’t make your payments in full and on time. While credit card debt may be bogging you down, it’s unsecured. Even if you default, the creditor doesn’t have the power to repossess any of your property. 

Compare these pros and cons as they pertain to your financial circumstances and goals. This will help you determine which path is right at present. 

Is Refinancing Your Mortgage a Good Idea?

Before you focus on the debt consolidation piece of the pie, you must first decide if refinancing your mortgage is the right thing to do.

If it’s not, it doesn’t matter how much you’ll benefit from debt consolidation refinancing. You won’t end up in a better place. 

The following are some questions you can answer to help you decide if refinancing your mortgage is a good move.

• What interest rate do you qualify for? If your credit history and score prohibit you from securing a low-interest rate, it may not make sense to refinance.
• Will you have to extend the term of your mortgage to make it work financially? Extending the term of your mortgage may lower your monthly payment. However, it also means you’ll pay over a longer period, which also means you may pay more in interest over the lifetime of the loan. 
• Do you qualify? Just because you want to refinance doesn’t necessarily mean that you’ll find a lender to approve your application. This is why it’s important to position yourself for success, such as taking steps to boost your credit score before applying. 
• What are the costs of refinancing? There are closing costs associated with refinancing, with the average hovering around $4,300. That’s money that you have to pay out of pocket to complete the process. 
• Do you have equity in your home? If you have interest in a debt consolidation refinance loan, you’ll need equity in your home to make it happen. Without this, there’s no way to access cash at the time of refinancing your mortgage. 

Take the First Step Today

Now that you understand the finer details of debt consolidation refinancing, there’s only one thing left to do: take action!

At My Perfect Mortgage, we’ll quickly and efficiently connect you with a lender who can walk you through the refinance process. 

From application to approval to appraisal to closing, your lender will show you the way. In the end, you’re left with a new mortgage and consolidated debt. Get started with us today.