Mortgage refinancing is a popular option for those who own property and are looking to pay off their consumer debt, whether that’s a personal loan, auto loan, or credit cards. In most cases, the argument is made that by securing their home against the consolidated borrowing, the debtor (you) can reduce their interest rate and obtain more favorable repayment terms. If this were simply the case, then mortgage refinancing would have to be the #1 debt management tool option for those fortune enough to have equity in their property. However, mortgage refinancing does come with some pitfalls. As such, the following is a quick look at some of the pros and cons of using mortgage refinance as a debt management tool:
Pros of a Mortgage Refinance
In case you are not already aware of it, mortgage refinance as a debt management tool is where you already own a home and are willing to ask a new lender to refinance that home, i.e. they give you money and you provide them with a mortgage. The proceeds of the mortgage refinancing you then use to repay your existing mortgage lender and, hopefully, all your other outstanding consumer debt. Utilizing a structure like this is helpful as it is quick, straight-forward and clean (i.e., you only have to deal with one creditor – the mortgage refinance company).
As an example: you have an existing mortgage for $100,000. However, your home is worth $150,000. Utilizing this as a debt management tool means asking a refinance mortgage lender to lend you $150,000 – the value of the house. You then use the $150,000 you have borrowed to repay your original mortgage lender their outstanding $100,000 and the remaining $50,000 that is left you use to repay your debt.
- Pro #1: the refinance is secured; therefore interest rates on the loan should be lower than is the case with unsecured consumer debt or a personal loan.
- Pro #2: you are only dealing with one creditor – your refinance mortgagor.
- Pro #3: in certain cases structuring a refinance mortgage is not only a good debt management tool but also makes practical tax sense as the government usually gives tax credits to home owners paying interest on a mortgage.
Cons of a Mortgage Refinance
Although there are certainly some very good points with mortgage refinance, there are also a number of pitfalls to keep your eye out for:
- Con #1: you’ve just provided security over your biggest asset – your home. Therefore, if you don’t make timely repayment of mortgage refinance you run the risk of losing your home. Because of this, you really need to make sure the numbers all add up and that you’re not going to have any problems making payments on your mortgage refinance.
- Con #2: using a mortgage refinance as a debt management tool is most likely not going to succeed if your existing mortgage lender doesn’t allow you to make early repayment of your existing home mortgage.
- Con #3: some existing mortgage lenders will make you pay a penalty if you want to repay their mortgage early. In such a case, mortgage refinance becomes and expensive debt management tool and most debtors prefer to try and find another method to repay their existing debt.
- Con #4: you’ll need to pay fees to your new mortgage lender so that they can have their appraisers appraise the value of your home to make sure they agree with what you say is the value of your home.
- Con #5: your new refinance mortgage lender may say, in your refinance agreement, that you cannot make early repayment of the refinanced mortgage. If you find your new lender doing this, be careful as you’ll not be allowed to make early repayment if you ever have the money to do so. Also, this make mortgage refinance a one-dip solution to debt management – you cannot use this as a debt management tool again in the future.