Why you shouldn’t use your Mortgage as a Debt Consolidation Tool

Many people can find it hard to keep track of a large number of debts from different sources. With perhaps multiple credit card debts, car loans, unsecured loans or student loans, debt consolidation is a tool which brings all the different payments together and allows for one monthly payment, usually at a reduced interest rate. However there is a marked difference between mortgage debt and other debt, and that is the mortgage loan is secured, with your home offered as collateral.

Whilst debt consolidation can be an excellent way to bring debt under control it only works effectively if it isn’t seen as an opportunity to continue spending your way back into yet more debt. Using your mortgage for debt consolidation is a very risky business. Effectively all your current debt is added to your outstanding mortgage debt and still needs repaying.

The longer term option which debt consolidation gives you can lead to the presumption that the debt has gone away and that you have control of your finances again, which clearly isn’t the case. All you will have done is added more costs to your mortgage, through the sum of debt consolidated; the additional high costs of refinancing; and the additional interest which you will pay in total.

The advantage which people perceive through using their mortgage for debt consolidation is the overall lower interest rate. However just because the monthly payment towards the overall debt is reduced it does not mean you will pay back less, but quite the opposite. An extended loan will mean that the original debts now cost more in total interest repaid. When the costs of obtaining an equity loan to complete the transaction are added in, the process of using your mortgage as a method of debt consolidation is actually fiscally unwise as well as risky.

Another reason why using your mortgage to consolidate debt is foolish is that it reduces the equity you have built up in your property. The greater the equity you have, the more security you have in your home, and less risk of foreclosure if you run into further financial problems. High equity coupled with an excellent credit score will allow you to obtain preferential interest rates which will enable you to pay the mortgage down more quickly, thus ensuring your home belongs to you rather than the lending institute which gave you the mortgage.

Way too many people have borrowed against the equity in their homes, believing themselves to be richer than they were due to rising house values. Fluctuating house prices can bring negative equity, and the home owner’s goal should be to establish as much equity as they can without borrowing against it.

Debt consolidation can be an excellent tool to bring your debts under control, but there are other less expensive and safer options than using your mortgage. Balance transfer cards can be used to consolidate credit card debt; student loans can be consolidated together; and even an unsecured loan for debt consolidation is a better move than risking your home, even if the interest rate is higher.

Although it may seem harder to address the debt directly through budgeting and concentrating on paying it down aggressively, it is a much wiser option than using your mortgage to borrow against. The discipline required to pay down the debt will lead to overall better control of your future finances, and the pain will be relatively short lived compared to the far greater risks you face when using your home as a method of debt consolidation.

It is worth remembering that second mortgages which have been used as a method of debt consolidation have resulted in a higher incidence of foreclosures. The risk has proven to be quite high and should be avoided in favor of other less risky options. As a method of consolidating debt, it is hard to see when using your mortgage ever makes sense in the circumstances.