Mortgage as a Debt Consolidation Tool: Desperate Measures for Desperate Times

By Richard Barrington
LoanPage.com Columnist

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Debt consolidation is by no means a cure-all for debt problems, but used with planning and discipline it is a better alternative than bankruptcy.

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The Threat of Bankruptcy

The threat of bankruptcy is very real: more than 2 million Americans filed for bankruptcy in 2006. The trade-off used to be that in return for some embarrassment and limitations on your ability to get credit for ten years, you'd at least get some relief from your existing debts. However, a recent bankruptcy law means individuals filing for bankruptcy may still have to pay most or all of their outstanding debts.

What You Can Do: Refinance, Renegotiate, and Mortgage

Debt consolidation should not be undertaken without planning and a commitment to discipline. With those ingredients though, it beats bankruptcy.

If you can commit to the discipline, check through the list of specific steps you can take:
  • » Refinance. Make a list of all your debts, and alongside list the interest rate you are paying for each. Then look for opportunities to refinance. Obviously, if mortgage rates have fallen since your original mortgage, that can be a huge opportunity. Even if you can't take advantage of lower mortgage rates, people are often paying very high rates on credit card debt that can be refinanced.
  • » Renegotiate. The last thing your creditors want is for you to default. Contact them to see if you can work out more favorable terms. Note that one benefit of debt consolidation is that a larger debt actually gives you more negotiating leverage.
  • » Mortgage. Do not use a mortgage to pay off other forms of debt unless you are sure you can make the payments. However, with careful planning, it makes sense to take advantage of lower mortgage rates and/or a longer payment term.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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