Do you currently pay a lot of different bills each month, some with high interest rates? If so, you might benefit from consolidating and paying off those debts through mortgage refinancing. Here’s what you should know about this financing strategy.
Mortgage refinancing is when you replace your current home loan with a new one, in order to achieve some kind of financial goal. Some homeowners refinance to secure a lower interest rate, thereby lowering their monthly payments. Some do it to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. Others use mortgage refinancing to consolidate and pay off debt.
Mortgage Refinancing for Debt Consolidation
As a debt consolidation strategy, refinancing allows you to consolidate and pay off bills with higher interest charges. You are essentially replacing several different debts with a single debt, ideally one with a much lower interest rate.
Not only does this simplify your finances by reducing the number of bills you have to pay each month. Under the right circumstances, it could also save you money by lowering the total amount of interest you pay over time.
This strategy works best when you can secure a much lower rate on your refinance loan than the one you’re paying on your credit cards and/or other debts. By eliminating the high interest rates on your credit cards, you could end up paying significantly less each month than you do when paying all the bills separately.
Things to Consider When Consolidating Debt
Consolidation does not eliminate your debt completely. It just moves it to a new place. So you’ll want to remain disciplined going forward, paying your monthly mortgage payments on time. It’s also wise to limit your credit card use, so you don’t end up in the same situation with high credit card balances.
Additionally, you’ll want to do the math to determine if refinancing works to your advantage over the long term. You might pay closing costs on your refinance loan, just like you did when you took on your current loan. The ideal scenario is to save more money over the long term (by reducing interest costs) than the amount spent to close the loan.