How Do I Consolidate Debt With A Mortgage Refinance?

When you refinance with a mortgage debt consolidation loan, you're essentially tapping the equity in your home to cover your debts. Your home then becomes collateral for the loan - so neglecting to pay it back could result in the loss of your house.

There are a variety of options when it comes to debt consolidation mortgage loans:

  1. Home equity loans, which allow you to borrow money by using your home as collateral, or property that is put up to guarantee the loan.
  2. Home equity lines of credit, which is similar to home equity loans in that they are taken out with your home as collateral. However, they differ from home equity loans in that borrowers will not get the entire amount financed in one up-front sum, but rather are able to use funds in a way similar to a credit card.
  3. Home refinancing loan, also known as a mortgage refinance. This is a new loan that pays off your old one. This may allow you to save on interest or payments, along with getting cash out to pay off debt.

Regardless of which option you choose, you will go through an application process somewhat similar to that of your initial mortgage, though the specific process will vary depending on your individual situation. Once you are approved, you will be able to use funds from the loan or line of credit to work on paying down your debt.

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What About A Debt Settlement Versus Mortgage Refinance?

You may also be considering debt settlement to consolidate your debt. What this entails is negotiating with your creditors to lower the interest rates on your accounts, while possibly managing to reduce your principal as well.

When considering debt settlement, you have to remember that this could have an adverse affect on your credit as it may be reflected as paying your bills late, even though you are indeed paying them down. In addition, you have to be careful in terms of the types of loans you are considering - if you're already in debt, you don't want to get in over your head again while actually trying to settle out the debt.

Video: How Debt Consolidation Loans Work?

Whether you opt for a mortgage refinance loan or debt settlement in order to consolidate your debt, it's up to you to make sure you're acting responsibly in terms of your financial world. After all, you don't want to end up needing to consolidate more debt because you're unable to pay it off.

How Does My Credit Factor Into All This?

As with most other loans, credit is a significant factor when it comes to seeking a mortgage refinance to consolidate your debt. In fact, with lenders getting more conservative as funds continue to grow more scarce, it will be to your advantage to have good credit when you go out to seek a mortgage refinance loan.

Good credit means a lot when it comes to these - or most any - loans. Applicants with good credit not only have a better chance of being approved for a mortgage refinance, but they will also likely be offered better rates and more favorable terms on the loan. However, in some cases, applicants with tarnished credit may benefit from a lower mortgage payment or getting cash upon the close of the loan.

Video: How to build good credit

Before a loan approval will be offered, you'll have to complete a full loan application and have a professional appraisal done on your home so that the lender is confident that the home is worth the loan money being offered. You'll also be more likely to be approved for a mortgage refinance if your background shows a stable job history, as lenders want to know that you'll be able to pay back the debt. Keep in mind that you'll also have to have funds available when the loan closes, since you'll need to cover fees including closing costs and appraisal expenses.

You may also be wondering if you will qualify for a mortgage refinance loan if you have no equity built up in your home. As with credit requirements, mortgage lenders have gotten more strict as funds have continued to grow scarce. In order to be approved for a mortgage refinance loan, your home will have to have at least 20 percent equity at the time you apply.

Food for Thought

When considering a mortgage refinance loan in order to consolidate your debt, there are several things you should consider before beginning the application process. The major ones are:

  • How long will you remain in your home? If you'll be there long-term, it makes more sense to refinance than if you plan to sell within the next five years, since the associated fees may mean you won't see much savings on the entire mortgage for the first few years.
  • Are interest rates favorable at this time? When you refinance to consolidate debt, you should make sure you're getting good interest rates on your new loan.
  • If you're considering an adjustable-rate mortgage, are you certain that you will be able to keep up with its fluctuations? Consider that you're already in debt, so you don't want to further gamble with your financial future.
  • If you refinance, at which point will you break even, meaning that your savings from lower mortgage payments will outweigh the upfront costs of a new loan?
  • Are you prepared to take on a new mortgage obligation? Even if cash out from the loan will help with your current debts, do you feel prepared to enter into a new loan?
  • Finally, are you confident that putting your house up for collateral is the best possible decision for you and your family? If you feel that consolidating your debts will help you get ahead financially and you feel confident that you will be able to keep up with the mortgage, a refinance may be a good option for you. However, if you are not certain, you'll be able to repay the mortgage, don't risk your home in the name of consolidating your debts.