Mortgage Methods: When to Consider Yourself a Candidate for Debt Consolidation

by Richard Barrington
LoanPage.com Columnist

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People tend to associate debt consolidation with financial distress, but there are better times to consider it. Ideally, you shouldn't look at mortgage refinancing and other debt consolidation possibilities when you are struggling with debt. Instead consider refinancing when you have cut down on your reliance on new borrowing and seek to get rid of past debts quickly and cheaply.

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What are You Looking For?

First look at what kind of debt you have. There are exceptions, but as a general rule, the larger the original loan, the lower the interest rate is likely to be. Since the lower interest rate is better, you can rank the following types of debt from most desirable to least:

  1. 1. Auto loans
  2. 2. Home mortgage
  3. 3. Home equity loans
  4. 4. Credit card debt
  5. 5. And other consumer loans

If you have a substantial amount of debt in the lower-ranked categories, it is possible that mortgage refinancing or other techniques might help you consolidate some of the debt into the higher ranked categories. However, remember that there are closing costs associated with mortgages, so the amount of debt you are consolidating has to represent enough of an interest savings to offset those closing costs.

As mentioned, you should only consider this when you've stopped accumulating new debt. Any type of mortgage uses your house as collateral, so you should only take on mortgage debt when you are confident of repayment.

Lower Mortgage Rates Create Refinancing Opportunities

This is a good time to look at refinancing because lower mortgage rates have created excellent opportunities. This makes it more likely that your interest savings could quickly offset closing costs and that those savings might be enough to substantially reduce what your debt ends up costing you in the long run.

Source

Freddie Mac

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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