By: Edward McCarthy
President: Sell By Owner Listings, Inc.

Using a Mortgage to Consolidate Your Debt

Many homeowners consider the possibility of using a mortgage to consolidate existing debt. If you have already repaid your mortgage, you can take out another primary mortgage. Taking out a second mortgage is an additional option to consolidate your debt for those homeowners who still have a primary mortgage. How sound of an idea is it to use a mortgage to consolidate your debt?

You should never use a mortgage to consolidate your debt if the interest rate for your debt is lower than the interest rate you would have on a mortgage. This would mean that you are paying a higher cost for the mortgage than you were paying on your debts. This is not a sound financial decision. There is a slight exception to this rule. If you your current debt has some kind of introductory rate that will expire and leave you with an interest rate that will be higher than that of the mortgage, then a mortgage to consolidate your debt is worth considering.

There are other factors, in addition to interest rate, that you should take into account when you consider using a mortgage to consolidate your debt. When you have less than 20% equity in your home, you are required to pay private mortgage insurance. If these premiums plus the amount of your mortgage without consolidating your debt is the same as or less than the amount of your mortgage with consolidating your debt, then you do not incur extra costs by consolidating. However, if the private mortgage insurance causes your monthly payment to increase, then consolidation is costing you.

A lot of homeowners make the mistake of thinking only about the monthly payment of their mortgage in addition to what they are paying on their debts without consolidating in comparison to the mortgage with debt consolidating. Take into account that when you consolidate your debt with a mortgage, you are paying it over a longer period of time, which accounts for the lower monthly payment.

Before you apply for a mortgage, you should find out your credit score. Chances are if you are having trouble with credit, then you have a less than perfect credit score. Remember that your credit score will affect the interest rate and terms you receive on a mortgage. If your credit score is below 600, the likelihood of you receiving favorable loan terms is low; not impossible, just low.

Keep in mind that when you use a mortgage to consolidate your debt, that the debt is not eliminated. Instead, you are transferring your debt from one form to another.

The best way to determine what it will cost you to consolidate your debt using a mortgage or pay them straight out is to use a mortgage calculator as well as a debt repayment calculator. Logic can be flawed, but numbers never lie. Bankrate.com has calculators that will assist you in both of these calculations. Use the calculator to test out different loan amounts and mortgage rates to get a good picture of how much it will cost you to consolidate your debt.

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