The Pros and Cons of Securing a Mortgage to Consolidate Debt
Buying
One of the primary reasons to purchase a home is to build equity.
When you’ve reached a point in your payments where the value of your home is greater than the amount of money you still owe on your mortgage, you have equity in the home, and you may be able to leverage that equity to secure a mortgage that allows you to consolidate your debt.
Ideal for people who have credit card or other high-interest debt, using a mortgage to consolidate debt can save money and simplify life in the long run.
For other people, though, this is anything but a good idea.
Read on to learn more.
Why get a Mortgage to Consolidate Debt?
In some cases, securing a mortgage to consolidate debt can offer borrowers cash to pay off credit card debt at a low interest rate. While rolling old debts into a mortgage can be risky for some buyers, consumers whose loan-to-value rate won’t be dramatically impacted by the consolidation can generally benefit from the process.
By far the greatest benefit of consolidating your old debts with your mortgage is that mortgage loans are typically issued at very low rates, and you may save money in the long-term by using your mortgage to pay down high-interest debt on credit cards or personal loans.
What are the Drawbacks of Getting a Mortgage to Consolidate Debt?
Just like there are benefits to making this decision, there are also drawbacks. One of the main drawbacks is that, for people who got into debt by simply spending more than they could afford (Rather than because of an emergency), consolidating debt may be riskier in the long run, as it will not improve spending habits and may make debt harder to pay down.
What’s more, there are additional costs associated with consolidating debt, and they can add up to thousands of dollars in some cases. Anyone who is interested in pursuing this option will need to ensure that they’re not paying as much in loan costs as they would be in interest, otherwise. People in these situations may be better off just paying down their debts and leaving their mortgage alone.
To Consolidate or not to Consolidate?
The decision of whether to secure a mortgage to consolidate debts is a difficult one, and it comes down to your individual finances and preferences. If your home has adequate equity and you won’t end up paying more on your debts by consolidating them, the option may be a great one for you.
If on the other hand, the consolidation will be more expensive in the long-run, or is just a bandage for bad spending habits, you’re likely better off focusing on your outstanding debts first, and leaving your mortgage alone.
While consolidating debt is a good option for some people, it can result in financial stress for others, and should be entered into very carefully.
