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.
