When is a Debt Consolidation Mortgage Right for you?

Of the types of Mortgage Loans that are out there, today we’ll talk about a debt consolidation loan, what it is, how does it work and if it would be right for you.

 What is a Debt Consolidation Mortgage?

Like is sounds, a debt consolidation mortgage is when you take a number of debts(normally credit card or other high interest rate debt) and consolidate them into mortgage financing that carries a lower interest rate, either as a 1st or 2nd mortgage, which normally improves cash flow.

How Does it Work?

For example, John, in Kansas City, has a home worth $150,000, owes $100,000 at 5.5% on a 30 year amortization, but has accumulated $20,000 in credit card debt due to being laid off work. However, John is back to work but is having issues getting back on his feet because of the excess debt.  John debt consolidation would take his $100,000 first mortgage, combine his $20,000 in credit card debt to have a new mortgage for approximately $120,000 plus closing costs. See Ex. A below.

Ex A.                            Balance                       Payment

1st Mortgage               $100,000                     506

Credit Card #1                 10,000                      250

Credit Card #2                 10,000                      250         

Totals                          $120,000                   $1,006

 

New Mortgage            $120,000                   $ 590 @4% for 30 years.

Exhibit A shows a monthly savings of over $416/month.

 

In some circumstances a 2nd Home Equity Line of Credit or HELOC would work better. A HELOC works like a combination of a credit card and mortgage. However, the interest rates are adjustable and have been harder to qualify for in this “Post Mortgage Meltdown” market.

A debt consolidation loan is not right for everyone. They normally apply to someone who has had an isolated life event causing them to have some credit card debt that they can’t payoff without restructuring.

They are not for people who continually live beyond their means and intend on using their home as a credit card.

To conclude, a debt consolidation loan has significant benefits for those who need it, but they aren’t for everyone. They are normally to restructure their debt from circumstances outside of their control but can be the financial break people need to get back on track.