Does it make sense to consolidate your mortgage with other debt?

May 17th, 2013 Doug Shanklin

If you have equity in your home and are carrying additional debts, such as credit card debt or auto loans, you may be wondering if it’s a good idea to refinance and roll your debts into your mortgage.

Just like all other personal finance questions, it boils down to – “maybe.”

If your debts are a result of poor financial habits, then rolling them into a new mortgage will likely leave you with a bigger mortgage and more credit card debts in the future (if you can’t curb spending.) As a result, you’d be worse off than if you never refinanced.

However, if your debts are a result of a specific cause – such as a medical emergency – and you have a track record of making payments, then it may make sense to refinance.

Advantages of debt consolidation

Consolidating your debts into your mortgage can potentially save you lots of money. Why? Because you’re likely switching debts from the double-digit interest rates that are common to credit cards to lower rates typical of refinances and home equity loans.

Home loans also have the added benefit of being deductible. Depending on your tax bracket, you may have the added benefit of deducting some or all of the interest you pay on the loan. That’s not possible with credit card debts or car loans.

Disadvantages of debt consolidation

Think carefully before you extend the length of your mortgage. Otherwise it might cost you more in the long run than if you had initially paid off the higher interest rate debts.

If you have a variable interest rate mortgage remember that your interest rate may increase, which will increase the amount of money you will have to pay on a regular basis.

Finally, remember that by putting your home on the line you are taking a risk. Make a commitment to pay off the home loan and not take on additional debt.

If you decide to move forward with consolidating your debts, keep these tips in mind:

  1. Be diligent about making your payments on a regular basis.
  2. Make a habit of putting down more principal to pay off your debt faster. This will help prevent you from digging a deeper hole. Always try to send in more than the minimum.
  3. Use any additional savings you have towards paying off the debt, such as tax refunds, raises, bonuses, etc.
  4. Pay your other bills on time to avoid having to take on additional debt.
Doug Shanklin

About the author

Doug Shanklin is Real Estate Banking Officer at MidWestOne Bank. Doug helps customers navigate the home buying process and achieve the dream of home ownership.

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