Pros and Cons of Consolidating Debt with a Mortgage Refinance

Thinking of consolidating your debt with a mortgage refinance? Here are a few things to keep in mind as you weigh your options:

Pros

Fewer monthly payments

By rolling your unsecured debts into a new mortgage, you’ll have fewer debts and debt payments to manage each month.

Fixed end date

If you’re only paying the minimum due on a large credit card debt, you could literally be paying for decades. Most loans (and especially mortgages) usually have a clearly defined payment schedule, which spells out what you’ll pay, when it’s due, how much will go toward the principle, and when you’ll have the whole thing paid off.

Lower interest rate

Depending on the market and the state of your credit, the interest rate for your mortgage will likely be lower than an unsecured loan and much lower than a credit card.

Interest deductions

Rolling your unsecured debt into your mortgage could save you some money at tax time. That’s because you may qualify for a mortgage interest deduction, which would allow you to claim a reduced income based on the amount of interest paid on your mortgage.

Cons

Adding years to your debt

Mortgages are typically structured to pay off in 15 to 30 years. You may not feel the unsecured debt after you’ve rolled it into your mortgage, but you’ll be carrying it with you for decades.

Best credit gets the best terms

If you’ve already missed a few payments and your credit score has suffered as a result, you may find it hard to qualify for the best possible refinance terms. Given how long you’ll be paying on your new mortgage, those rates can cost you a lot over time.

Your home is on the line

You should always be careful using your home as collateral for debt consolidation. If you default on your refinanced mortgage you run the risk of facing a foreclosure.

Less flexibility

Should your situation deteriorate and you struggle to make any kind of debt payments, you may find yourself considering bankruptcy. Bankruptcy is a perfectly acceptable option, but your options may be somewhat limited if your debts have been consolidated into a home equity loan or mortgage. You may not be able to discharge your debts without losing your home in the process. Be sure to consult with a qualified attorney if you’re considering bankruptcy.

Closing fees

Most mortgages include a variety of fees, which are either collected at closing or added to your mortgage debt. Keep in mind the costs of taking out a loan in the first place.

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