Refinancing & Loans

Why Consolidating Your Debt Saves You Money - Even When Mortgage Rates Aren't Great

July 19, 2024
Hand pointing at graphs to explain a debt consolidation strategy.

In today’s economic climate, mortgage rates may not be at their best, but consolidating your debt into a mortgage refinance can still be a savvy move. Here’s why consolidating your debt can save you money.

1. Interest Rate Comparison

Rates on a refinance are still lower than the interest rates on credit cards, personal loans, and other unsecured debt. Credit cards often carry interest rates of 20-25% or more. If you can consolidate this high-interest debt into a mortgage with a lower rate, even if it's higher than previous mortgage rates, you’ll still save on interest costs over time.

2. Single, Manageable Payment

Having multiple debts means multiple payments and due dates to keep track of.  This can be hard to manage  and may  lead to missed payments and even more fees, impacting your credit. Consolidating your debt into a single mortgage payment simplifies your financial life. This single, lower payment reduces the stress of juggling multiple bills.

3. Cash Flow Improvement

Consolidating debt into a mortgage can reduce your overall monthly payments. By spreading out your repayment over a longer term, even with a less-than-ideal mortgage rate, your monthly obligation is likely to be lower than the combined total of your separate debt payments. This can significantly improve your cash flow, giving you more financial flexibility each month.

4. Credit Score Improvement

High balances on credit cards can negatively impact your credit score due to high credit utilization ratios. Paying off credit card debt through mortgage refinancing can lower your credit utilization ratio, which can improve your credit score over time. A better credit score can open doors to better financing options in the future, saving you money on various types of credit.

5. Long-Term Financial Health

Debt consolidation through a mortgage refinance is about more than just immediate savings; it’s a long-term strategy for better financial health. By reducing high-interest debt and simplifying your payments, you can create a more sustainable financial plan, leading to greater financial stability and peace of mind.

Of course, while there are many benefits to a refinance, there are also some important considerations with this strategy.

First, refinancing comes at a cost. Closing costs, typically ranging from 2% to 5% of the loan amount and to be expected. Your mortgage professional will run scenarios to make sure a refinance makes sense, taking into consideration any penalties to break your existing mortgage, appraisal fees, new legal fees, etc.  The long-term savings must justify these upfront costs.

Secondly, extending the term of your mortgage can lower monthly payments but may increase the total interest paid over the life of the loan. Your mortgage professional can weigh the pros and cons with you, showing you exact scenarios to determine the best option and timing for your situation.

Example Debt Scenario

Before:

Balance
Payment
Existing Mortgage
(at a 6.94% rate)
$ 497,000
$3,253
Credit Card 1
$22,094
$525
Car Loan
$26,000
$812
Credit Card 2
$17,000
$244
Penalty
$7,900
Legals And Approval
$2,200
Total
$572,194
$4,834

After:

Balance
Payment
New Mortgage
(at a 5.14% rate)
$ 580,000
$3,420
Total
$580,000
$3,420
This makes for a total savings of $1,414 every month.

Anyone can suggest a refinance but it only makes sense if going forward, you maintain financial restraint and discipline. This would include avoiding large purchases, setting a budget, investing in savings, and not accumulating new high-interest credit card debt .

If you’re considering this strategy, consult with a mortgage professional to explore your options and develop a plan tailored to your financial needs. With the right approach, consolidating your debt can be a powerful step toward financial freedom and peace of mind.

Feel free to reach out if you have any questions or need personalized advice on how consolidating your debt through mortgage refinancing could work for you. Let’s work together to find the best path to financial success!