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5 Reasons Why Consolidating Your Debts into Your Home May Be a Bad Move

This article explores when and where consolidating debts into your home loan may not necessarily be a good option.

5 Reasons Why Consolidating Your Debts into Your Home May Be a Bad Move

If you're swimming in debt, you may feel like you're at the end of your rope. You may feel like all of your options have been exhausted, and debt consolidation is your only choice.

For the majority of people struggling with credit card and personal loan debt, the only collateral they may have is their home loan. If you have been making your home loan repayments in a timely manner and have paid off your mortgage for several years, you may be eligible for a mortgage debt consolidation loan. 

What Is a Mortgage Debt Consolidation Loan?

A mortgage debt consolidation loan will combine multiple high-interest debts, including:

  • Personal loans
  • Credit cards
  • Store credit accounts

All of these lines of outstanding credit will be rolled over into your home loan so that they can be paid off at a lower interest rate. For many people, mortgage debt consolidation provides the opportunity to take advantage of lower interest rates so that all debts can be paid off at once.

Yet mortgage debt consolidation is not always as good as it seems. There are drawbacks to consolidating all of your debt into your home that must be explored in detail before making such a critical decision regarding your finances.

5 Risks of Mortgage Debt Consolidation

  • You could lose your home. This is a fact that many people may not want to face when they consider mortgage debt consolidation. But if you are not able to pay off this new consolidated mortgage on a monthly basis, you could potentially lose your home since it has been put up as collateral. While mortgage debt consolidation may initially seem like the smartest option if you are struggling with overwhelming debt, you must know beyond a shadow of a doubt that you have the funds to repay this new loan each month so that your home is not at risk.
  • You could accrue additional costs. Compared to the regular refinancing of a home loan, mortgage debt consolidation could cost thousands of dollars extra. If interest rates are not low enough in the debt consolidation, you will be paying additional closing costs that will negate any interest savings from lumping the debts together. If you have any questions or confusion about the costs of your debt consolidation, consult with an accountant before making this decision.
  • Regular refinancing may be good enough. Instead of using debt consolidation with your home as collateral, refinancing your mortgage could provide you with extra cash flow to quickly pay off debt. When you are able to pay off debt against the principal, you are saving thousands of dollars on a yearly basis since you will avoid paying outstanding interest. This is a more ideal option for people with a moderate amount of debt who do not want to put their home on the line with debt consolidation.
  • You may pay more in interest. If you don't have a large amount of outstanding debt, the cost of mortgage debt consolidation could rack up more in interest charges than what you were paying initially. Make sure to read all debt consolidation paperwork carefully to ensure that rolling your debt into your home is a financial move that will actually save you money - instead of wasting extra money on unnecessary interest rates and fees. If you delay payment, this can also increase your interest payments, even if you have a lower interest rate.
  • You may take on more debt. Unless you have a clear financial strategy to pay off your debt as quickly as possible, many homeowners make the mistake of continuing to spend after their debt has been consolidated. A homeowner may feel like they have more cash flow since they are paying a lower amount each month, yet the debt is still there. It has not gone away; it has just been consolidated. And if you do not take mortgage debt consolidation seriously with a strategic repayment plan, you may need to consolidate your debt again years down the road if you take on additional lines of credit that you can't afford.

For many homeowners with a large amount of high interest debt, such as car loans, store cards, and credit cards, lumping all of the debt together into one monthly repayment may seem like the best option at face value. However, debt consolidation should always be approached with caution, especially if you are using your home as collateral.

The deciding factor as to whether home loan debt consolidation succeeds or fails will depend on how you manage your finances after you have consolidated your debt. If you have a clear financial strategy, this type of debt consolidation could be a necessary tool to help you pay off debt. But for many homeowners who do not go into mortgage debt consolidation with both eyes open, it often turns out to be a decision they regret.