Homeowners who need to consolidate their high interest unsecured debts often wonder what is the best way of doing it. Is it best to refinance your first mortgage or take out a second mortgage or Home Equity Line of Credit?
Recent increases in the Prime Rate have made the Home Equity Lines of Credit much less attractive than they were a few years ago.
Using a mortgage refinance to consolidate your debt can be prudent because on interest mortgage debt is tax deductible. Consolidating your debt with non-deductible interest like credit cards or auto loans can lower your payments and increase your deductions.
Taking advantage of refinance programs which allow you to consolidate your debts and modify the rate and term of your first mortgage, such as adding a minimum payment option, can allow you to really boost your cashflow or focus your finances. We have had customers who were paying 2500 a month in mortgage + credit card & car payments drop down to making one minimum payment of 1100 dollars a month after debt consolidation refinancing. In the same situation, a second mortgage would have only reduced their total monthly spending to 2150 a month.
One thing to watch out for. Many home equity lines of credit will report on the borrower's credit report as revolving debt rather than mortgage debt. This can often cause a substancial detriment to a borrower's credit score. Feel free to call me and I can help you determine how your HELOC is reporting. If it is reporting as revolving account, you should insist that the lender report it differently or refinance out of it.
Typically home equity lines of credit are reported as revolving debt if the loan amount is under $50,000.00 (check with your local lender guidelines). Most home equity lines of credit are also interest only payments that adjust on a monthly basis which may make things even more difficult for a homeowner over the long run.
In that case, refinancing your debts into one mortgage may make more sense than obtaining a high interest, fixed rate second mortgage or a home equity line of credit.
In today's rising rate environment, Home Equity Loans, Lines of Credit and other short term interest rate-linked forms of financing are increasingly risky liabilities to have on your creditand your home. Consider consolidating all of your revolving and secondary debts into a single loan.
Don't use a home equity loan as a way to manage your outstanding debt. Instead, use it as a way to eliminate your debt entirely. Find a good mortgage broker that will show you how to use your monthly savings to pay off all of your debt, including your mortgage, in a much shorter period of time.
You can consolidate your debt with a simple debt consolidation mortgage and make the payment tax deductable. And if you are wise, use that loan to manage and pay-off your mortgage in half the time.
For a free consultation regarding which debt consolidation options would be best for you, call me at 888-418-4467.
A good mortgage broker can work out a cost analysis breakdown for you to show you the pros and cons of refinancing your first mortgage to consolidate your debt versus taking out a second mortgage or home equity line of credit to consolidate your debt. One advantage of a home equity line of credit is that many times you can obtain one without any closing costs at all. In the right situations this can be very beneficial to a consumer instead of paying the closing costs on a first mortgage, especially if there is any chance of not keeping the loan very long or moving.
Often you can get a lower combined rate and a lower payment by refinancing your mortgage instead of getting a 2nd mortgage or a home equity line of credit. Your mortgage professional can make these calculations for you.