Consolidating debt into your mortgage good idea
One of the best reasons to refinance is to lower the interest rate on your existing loan.
Historically, the rule of thumb was that it was worth the money to refinance if you could reduce your interest rate by at least 2%.
Homeowners who are looking to consolidate their debts have the option of using their home equity to secure a loan or line of credit.
A home equity loan or line of credit allows you to obtain a lower interest rate and a higher credit limit by using the equity you've built in your home as security.
Some of these motivations have benefits and pitfalls.
And because refinancing can cost 3% to 6% of the loan's principal and – like taking out the original mortgage –requires appraisal, title search and application fees, it's important for a homeowner to determine whether his or her reason for refinancing offers a true benefit.
Refinancing a mortgage means paying off an existing loan and replacing it with a new one.
There are many reasons why homeowners refinance: the opportunity to obtain a lower interest rate; the chance to shorten the term of their mortgage; the desire to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; the opportunity to tap a home's equity in order to finance a large purchase; and the desire to consolidate debt.
However, if you're a homeowner, you have additional options to help you manage your debt, including a debt consolidation mortgage and home equity loan or line of credit.
If you lose your job or encounter financial difficulties, guess what you risk losing? The vast majority of people who take equity out of their home to pay off bills don't change the behavior (overspending) that led to owing money in the first place.
That means the credit card balances are run back up, and when you combine that with your higher house note, you end up in double debt.
You are modifying your current mortgage to more favorable terms, be it a lower interest rate or a shorter note.
If you do it, your new payment should be no more than a fourth of your take-home pay on a 15-year fixed-rate note.
A way to gauge the numbers is to do a break-even analysis.