Some of the cheapest and most effective debt consolidation strategies are those available only to existing home owners. People who have had their home for a decade or more, usually have significant equity in their property, this equity may be able to be used to consolidate their other and more expensive unsecured debts.
How does it work?
In order to consolidate your other debts into your mortgage you would need to refinance your current home loan and increase it by the amount of your other debts. For example a home worth $400,000, with an existing mortgage of $250,000 and other debts of $50,000. Your overall mortgage would increase to $300,000 and the extra money borrowed on your home loan would be used to fully pay out your other debts.
The main advantage of this type of debt consolidation is that the borrower does not have to pay double digit interest rates on their unsecured debts. Instead the previously unsecured loans are now a part of your mortgage. You get to repay them over a longer period of time therefore your set periodic repayments are much lower. That of-course is the theory behind this sort of debt consolidation. Before proceeding with it in reality you would need to compare what your expected loan repayments will be vs what they are today.
Will you qualify?
Whether you will qualify for a refinance that will include your other debts is dependent on several factors:
(i) Available equity in your property – if your current mortgage is rather high in relation to the value of your home you may find that you are not able to borrow any more against your property. People who already have some history of bad credit are unlikely to be able to borrow more than 80% of the value of their home.
(ii) Income vs Debts – to be able to qualify for a refinance that includes debt consolidation you need to demonstrate sufficient income to be able to afford the higher loan.
(iii) How bad is your credit history – Take care not to go into arrears with your mortgage. If you are behind already it will be next to impossible to refinance and consolidate any further debts. Of course if you have an undischarged debt agreement or a current bankruptcy, it will not be possible to borrow more money without settling these debts.
Will you save money?
In most cases consolidating unsecured debts into a mortgage will reduce monthly payments by hundreds if not thousands of dollars. This does not mean that you will pay less for these debts overall. If you take 25 years to repay your mortgage it will then be an extra 25 years that you will incur interest on the larger loan. It is therefore important to make every effort to reduce your mortgage principal after debt consolidation, not simply keep to minimum set repayments.