Mortgage Refinancing: Your Debt Consolidation Strategy

Financial hardship is one of the toughest types of stress to deal with, and Americans are feeling the sting. Total household debt rose by 1.3% in the third quarter of last year, with increases in mortgage, credit card, and student loan debt. 

Controlling monthly outgoings can be especially hard for homeowners. But there’s light at the end of the tunnel in the form of a debt consolidation refinance. This strategy allows you to leverage your home equity to pay off loans and rein in your monthly bills. 

Whether you’re familiar with refinancing or it’s a new concept, you need to consider a few things. Knowing when to refinance mortgage loans is key. You should also weigh the small cost to refinance mortgage loans to ensure it’s the right move for you. 

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How a Debt Consolidation Refinance Works

If you’ve decided to refinance your home to achieve financial stability, your goal should be to eliminate high-interest debts. For many, these are car loans, credit cards, and student loans.  

By refinancing, you get a new loan with different terms. The new loan pays off your current mortgage and other debts that are keeping you underwater. In a nutshell, you’re replacing high-interest debts with a single low-interest loan.

The process of applying and getting approved for a debt consolidation refinance is similar to your original mortgage. Your lender looks at your credit score, income, debt volume, and the value of your home to determine a new interest rate. Because you’re using the new loan to consolidate debt, there’s a good chance you’ll need to have your home appraised. 

You’ll receive new terms, including the interest rate, term length, and other fees or conditions. Once the funds are distributed, you can pay off your high-interest debts. 

If this sounds like a good strategy for you, it’s important to work with an experienced broker who can advise you when to refinance mortgage loans based on interest rates and your financial situation. 

The Advantages of Mortgage Refinancing 

Of course, the overarching benefit of refinancing is that you can consolidate debt and get to a more stable, stress-free financial state. But you may be asking yourself what factors contribute to this. 

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Attractive Interest Rates

For many, this is the primary benefit of a debt consolidation refinance. Securing a lower interest rate will reduce your monthly mortgage payment and replace high-interest debt. Plus, with lower monthly outgoings, you can use the extra cash to work toward other financial goals.  

Simpler Money Management 

Tracking your budget can get overwhelming when you’ve got a handful of minimum payments going out each month. A debt consolidation refinance helps you roll all your bills into one. This gives you better control of your budget and reduces financial stress. 

Tax Breaks

You may be able to deduct the interest on your refinance. You can’t do this with your credit cards or car loans. Talk to an accountant during tax season to find out if you can save money by claiming your mortgage interest. 

A Boost to Your Credit Score 

Paying your new loan on time can help strengthen your credit score. This is a huge benefit if your credit has been damaged by outstanding debt. If you ever want to refinance again, a healthy credit score will help you qualify for more attractive loan terms. 

A Shorter Loan Term

Switching from a 30-year to a 15-year loan when you refinance allows you to pay off your mortgage faster. Your monthly payments will be higher, but if you’re able to consolidate debt and free up money, this may be an option for you. You’ll need to consider your future plans, income, and budget when making this decision. 

Potential Challenges 

Although a debt consolidation refinance usually favors the borrower, there are some possible setbacks you should know about. Considering these challenges alongside your current situation may inform you when to refinance mortgage loans and whether it’s the right move. 

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Additional Expenses

Although you save money by consolidating debt, there’s still a cost to refinance mortgage loans. Like your original mortgage, you’ll have to pay closing costs, origination fees, and other expenses. You’ll need to work these costs into your long-term financial goals.  

Market Fluctuations 

The real estate market and overall economy are unpredictable. A sudden fluctuation could affect interest rates, making a debt consolidation refinance impractical. Fluctuations could also affect your home’s value. That’s why you need to work with a knowledgeable mortgage broker who can advise you when to refinance mortgage loans. 

Managing Unsecured Debt 

Mortgage loans are considered secured debt, which means your home acts as collateral. Credit card debt, on the other hand, is unsecured. When you consolidate unsecured debt into a secured mortgage loan, this means you could lose your home if you fail to make payments. 

Qualification Hurdles 

Your credit score, income, debt-to-loan ratio, and home equity all factor into the refinancing approval process. If your financial situation has deteriorated since you took out the original mortgage, you may have a hard time getting approved. 

Know When to Refinance Mortgage Loans

If extensive debt is holding you back from living the life you want, applying for a mortgage refinance right away may sound tempting. But acting too fast can hurt you in the long run. 

When determining when to refinance mortgage loans, you should look at several factors:

  • Your current financial situation
  • The state of the real estate market
  • Your long-term goals

If your credit score has taken a hit, you may not get the interest rate you want on a refinance. This could throw off your debt consolidation plans. In this case, consider building up your credit before you apply. 

The real estate market is always changing, and a shift could affect your loan terms. Find out what interest rates are at the moment. You may benefit from applying right away or holding off until rates improve.

Finally, think of debt consolidation as a long-term solution. Your new loan will improve your current financial situation, but does it make sense for your future plans? Consider this when deciding on loan terms and look to your broker for direction. 

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Start Your Journey to a Debt-Free Life

If you’ve decided a debt consolidation refinance is right for you, there are several steps you need to take to begin. A little preparation makes the process faster and easier.  

Use this checklist:

  • Make a list of all your outstanding debts and monthly payments. 
  • Decide how much debt you want to consolidate. 
  • Check your credit score. 
  • Gather financial information like paystubs, bank statements, and tax documents. 

At The Moreira Team, we work with homeowners to find the best option for their needs and advise them when to refinance mortgage loans. We’ll evaluate your situation, advise you on the type of loan that’s right for you, and let you know what’s available. This will give you a bird’s eye view of how your debt consolidation strategy will work.  

Get a Custom Rate Quote

Take the first step toward a stress-free life with a debt consolidation refinance. 

The Moreira Team will guide you every step of the way – from the application process to the final closing. We’ll find the best mortgage rates in GA so you can reduce your monthly outgoings and get back on track.  

Get a quote today!