A debt consolidation loan is a new loan with a balance that’s larger than that of your existing mortgage. You use the cash difference to pay off other debts – typically those with higher interest rates, such as credit card balances.
Because a home is often a person’s largest asset – and because interest rates on mortgages are often much lower than on things like credit card debt – refinancing to a debt consolidation loan is a popular way to bundle or consolidate many obligations into one loan.
First, take a look at the outstanding debts you want to pay off: credit card payments, car loans, student loans. Consider their current balances, minimum payments and interest rates. Then compare refinancing to this type of mortgage loan against other options for debt consolidation, like a personal loan. Throughout the process, it’s important to remember that debt consolidation doesn’t lower your overall amount of debt – it simply rolls all loan balances up into a single loan. It is also important to consider that the debts you may be consolidating or paying off are typically not secured by your home. If you consolidate those debts with a debt consolidation mortgage loan and you fail to meet the repayment terms of your new mortgage, you could lose your home.