You want to retire with no more mortgage or other debt. You may be looking into using a mortgage consolidation loan to get there. Sounds great doesn’t it? But is it right for you? Do you know the good and the bad involved in this? You need to understand the negatives and pitfalls of using a mortgage to pay off your debts. Let’s get started.
As a home owner, you might be able to get a consolidation loan and start attacking your personal debts. You need to realize that the debts you pay off are not really paid off. You are really just relocating the debts to the mortgage consolidation loan and there is good and bad involved in that. We’ll look at both here.
Replacing the current first mortgage with a new mortgage consolidation loan to pay off debt has been a popular strategy over the last several years. It isn’t always the best way to go and many home owners have found themselves deeper in debt with less equity afterwards. While others have made strong headway towards getting control of their debt and are paying it down aggressively. You could also use a home equity line or second mortgage loan if you do not want or can not replace the first mortgage for the same strategy. Above all, keep your goal of having no more mortgage or other debts and getting there years sooner than you would have.
First, the benefits of consolidating should be:
1. Cash flow improvement. It’s common to have extra cash to work with immediately thanks to the new mortgage consolidation loan payment size and the elimination of the other payments. You could see a significant difference between payments on the new loan versus the old loan including the old personal debt payments allowing you to save possibly hundreds of dollars a month or even more.
2. Improvement in interest rate paid on the personal debt. We’ve seen mortgage rates fall like a stone over the last few years. You usually have much higher interest rates on the expensive compounded interest credit cards. Mortgages are calculated at simple interest which helps keep the personal debt from getting out of control as credit card debt often does. And the single mortgage payment is a number that won’t fluctuate on you.
3. You gain an improvement in your personal tax liability. In the majority of cases, you are able to write off the interest you pay on your mortgage debt. Credit card debt interest is rarely able to be written off nowadays. Your tax professional will be able to affirm your eligibility for tax deductions. You can also discuss whether you should change you deductions to bring more cash home to work with if you are over paying on your tax liability. As you get closer to paying off your mortgage you’ll find that you have no more mortgage interest deduction at a certain point. So take advantage of it while you have it.
4. A mortgage consolidation loan can reduce the total number of payments and checks you have to send out every month which makes things a little easier to track.
5. You can use the additional cash flow you generated by consolidating the debts to work for you on decreasing your overall debt. Using the additional money you gained with the new smaller payment you can attack the mortgage when all other debts are paid off. You could use the payment savings to knock your 15 or 30 year mortgage down much faster. Using this strategy can also help you rebuild equity you lost in a down market or a previous refinance quicker too. Take a minute and think about what this all could mean to you. You could be debt free with no more mortgage payments and very bright future years ahead of schedule.
Now let’s look at possible negative aspects of the consolidation loan:
1. You are taking out a new mortgage loan that is bigger than the one you had before. Be sure that you can afford to easily make the payment on the new loan in a timely manner each month. Your improved cash flow due to the consolidation should improve your ability to do this.
2. Costs and fees on your new loan. Make sure you know how much the costs are for your new loan. Take the fees into account and decide on whether the new loan still makes sense to move forward with. Don’t sign the paperwork until you are absolutely sure that the loan will meet your payment requirements and help you move towards your financial goals of having no more mortgage or other debt years ahead of time.
3. Your overall debt could initially increase through a consolidation loan. Many personal debt consolidation loans don’t lower your monthly debt payment enough to make the loan worth it. If you are not gaining enough additional cash each month to make extra payments against the mortgage consolidation loan, it might not be a good choice for you. It has to make obvious sense or you need to re-think what you are doing.
Essentials for you to understand:
1. Over the last few years we have seen far too many home owners that meant well but ended up far worse off than they were before getting a consolidation loan. There were many home owners getting consolidation loans which freed up their credit cards and then a year or two later they had filled up their credit cards all over again.
Had they been able to show some financial discipline their outcome could have been much different. Instead of achieving their goal of having no more mortgage years in advance, they have stretched out their debt and will spend thousands more than they would have.
You aren’t going to make headway against your personal debt if you keep building it up again. Moving your debt around has given you additional cash flow to use to your benefit. You need to take advantage of it. Debt has a way of sneaking back up on you when you least expect it and can easily wipe out your cash flow improvement if you aren’t disciplined.
2. Your mortgage guy’s commission could be directly tied to the interest rate on your loan. If you are paying an origination fee your rate might not be higher than the market if they aren’t getting paid that way. They could also get paid on the front and the back meaning based on rate plus an origination fee on the loan.
You need to know exactly what you will be paying monthly and what your costs are so examine the initial and final paperwork before signing. Don’t be surprised if you end up haggling over rate as like I mentioned above it could be directly affecting the amount your mortgage company will make on the loan.
3. It’s common to see the loan choice determined by the amount of cash out and debt that can be paid down. Yes, it is appealing but that doesn’t mean it is a good strategy as you are paying interest on that money. Don’t waste any of that money on things you want as it will end up costing you additional in the long run.
4. There could be penalties on your loan if you pay it off early so watch out for that common trap. It has been common for home owners to spend hundreds to thousands of dollars on pre-payment penalties they weren’t expecting. The current mortgage on your home could have a pre-payment penalty you are not aware of so be sure to check your documents. You would be surprised at the high percentage of people that don’t know they have an early pay off fee.
Look through the original paperwork for your loan to see if you have a penalty. There is often a 2-5 year period you have to wait through in order to have no more mortgage pre-payment penalty when you refinance or sell.
You want to talk to a few mortgage professionals to get an idea of who is working with their client’s best interest at heart. Get recommendations from people you know and ask them why they were happy with their choice. You should also look up whoever you are going to work with at the Better Business Bureau website.
With the information you have so far, add this too.
1. When you are paying off debt with your mortgage you are not really paying anything off. Your mortgage just swallowed up the debts making it even bigger. As part of the cash flow trade off you have added to the risk of your mortgage should you lose your employment or are unable to work. It is a smart move if you are able to ensure you will be paying down the mortgage with the surplus cash flow you receive. But you could very easily run your debt up beyond where it was if you don’t have discipline and stray from your strategy. You’ll never have no more mortgage payments that way.
2. Being able to cover the new higher mortgage payment is a necessity. The new payment will be less than you were paying out on your total personal debt before. You also need to be careful not to consume the freed up cash.
3. If your strategy is only for 3 years or less you may not see gains if your new consolidation loan has high fees involved. Compare the expected cash flow improvement to the loan costs for the period you’ll be in the house and decide if it’s worth it.
4. If you are looking for a short term solution look at adjustable rate mortgage consolidation loans as they could have a lower rate you can take advantage of. If you are looking at a long term strategy then a fixed rate loan is a safer solution.
5. You could be able to find home equity lines where you live. This can be very dangerous in the long term. Access to the equity in your home is usually a very bad idea, especially if you are not very disciplined. History has shown that most home owners will spend far more of their equity than they planned to. Don’t fall into that trap.
6. You may have gone through a refinance in the past yourself or known someone else that did that didn’t help you get as far ahead as you would have liked. If you have you should consider a personal debt elimination strategy that incorporates a program you can use to stay on track. Your initial goal was to be debt free and have no more mortgage payments. You can make this happen with discipline and good strategy.
Regardless of what you want to accomplish financially, you should be taking advantage of the foundation of financial planning.
When you learn to budget well and stick to your budget you will experience significant change in your finances and headway towards controlling your debt. You will be able to plan better and not have to rely on credit cards to bail yourself out of unexpected expenses. Get on track to having no more debt and no more mortgage payments.
Take advantage of the best free financial tool you have to make a real change in your future. Master budgeting and have no more mortgage [http://www.nomoremortgagebudgeting.com] payments or any other debt years ahead of time.