Debt Breaker

A mortgage typically runs for many years and there are often very sound reasons for refinancing a loan which was taken out several years ago. For example, if interest rates have dropped significantly since your mortgage was arranged you may wish to refinance to not only reduce your monthly payments, but also to lower the total amount of interest to be paid over the remaining years of the loan. Similarly, you may wish to take advantage of the increased equity in your property to finance home improvements or to help meet the cost of putting a child through college.

The one thing that you need to consider very carefully however is whether or not mortgage refinancing your debt is a suitable solution when it comes to raising money to meet credit card and similar debts.

Mortgage loan refinance and debt consolidation is not a simple process and will often involve almost as much work as getting your original mortgage. You will need for example to produce statements of your current earnings and copies of your previous tax returns as well as a host of other paperwork. There will also normally be not inconsiderable costs involved and these will need to be taken into account when calculating the overall cost of this as a solution to your debt problem.

Mortgage refinance can of course be a solution when it comes to credit card and similar debts but there are other, often far better, solutions. For example, if you have a reasonable credit history and some equity in your property you could consider a second mortgage or a homeowner’s equity line of credit (HELOC). These would normally be slightly more expensive than re-mortgaging but require considerably less effort and give you much greater protection if you run into further financial problems. Running late with payments, or missing payments, on a secondary loan is not to be recommended but at least if this happens you are not likely to lose your home, which could happen if you run into problems meeting your main mortgage repayments.

Perhaps a more important thing to consider here though is the simple principle of using your mortgage to clear your debts. What you are in essence doing here is borrowing more money in order to clear your debts and when your problems have arisen because you have borrowed too much in the first place the answer is not to try to solve the problem by simply borrowing yet more money. This is a common mistake which many people make when trying to get out of debt and, while it often produces a solution in the short term, it invariably creates greater problems in the long term.

This is not to say that there are not circumstances in which refinancing your mortgage is not the best solution but, where this is the case, it is normally a matter of this being the best of a bad bunch of solutions which your own particular circumstances have backed you into. Nine times out of ten you will find that there is a better solution to your debt problem and you should only put your home at risk to clear your debts as a last resort.