How to Lower Your Payments with a Debt Consolidation Refinance Mortgage?

If you need a better monthly cash flow, then a debt consolidation refinance mortgage may be for you. In the past, many borrowers would look to home equity lines or second mortgages to consolidate their non-mortgage debt. But home equity line lenders have cut back substantially on the maximum loan to value (LTV) that they are willing to lend on a property. So the best option today for consolidating debt is to refinance into one new fixed rate first mortgage.

Cash-out Refinance Loan

When consolidating non-mortgage debt into a new mortgage loan, it is important to understand that mortgage lenders see this type of loan as a cash-out refinance loan. While you may be paying off a number of outstanding debts and not be getting any money from your refinance closing, the transaction is adding new mortgage debt to your home. Cash out refinance loans from Fannie Mae and Freddie Mac have lower LTVs than refinance loans where you are just paying off your existing balance plus closing costs (referred to as rate/term refinances).

There are several ways to consolidate your existing debt into one new home refinance mortgage:

• Pay off your existing first mortgage along with other non-mortgage debt such as credit cards, car loans or student loans.
• Pay off your existing first mortgage loan plus an existing second mortgage loan.
• Pay off your existing first and second mortgage along with other non-mortgage debt.
• Pay off your existing first mortgage and pay off non-mortgage debt but leave your second mortgage in place through a process called re-subordination.

Each one of these options requires careful analysis and planning to make sure that you qualify and that the transaction makes financial sense.

In many cases, borrowers are consolidating debt that is both interest-only and fully amortizing. In addition, many borrowers are consolidating short term credit card debt into long-term mortgage debt. If your purpose in consolidating into a new fixed rate mortgage is to cut your monthly payments so you can either begin paying down on your remaining debts or increase savings, then a debt consolidation refinance loan will help with your long-term financial goals.

On the other hand, if you consolidate your existing loans and then immediately start accumulating additional debt, you will soon find yourself in a worse financial position than before you refinanced. Many people assumed over the past few years that they would able to turn to debt consolidation refinance loans to consolidate the debts they accumulated on a continuing basis. Obviously, the recent down turn in the housing market has wiped out the equity for most borrowers to be able to do that.

One additional caution on taxes: many borrowers assume that any mortgage debt they have is fully tax deductible. However, when you refinance to take cash out of your home for non-housing debts, you may not be able to deduct that portion of your mortgage. Consult your tax advisor for your particular financial situation.

Choosing a debt consolidation refinance mortgage loan should be done in conjunction with a review of your overall financial plan.

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