Interest rates: Compare the interest rate on your current debts with the new rate you could get on a refinanced mortgage. If the new mortgage rate is significantly lower, consolidating debt could save you money. However, if rates have risen since you took out your original mortgage, refinancing might not be as beneficial as keeping your debts separate because you could end up paying more in interest.
Loan term: Extending your loan term by refinancing may reduce your monthly payments, but it could also mean paying more in interest over the life of the loan. Consider how much longer you’re willing to make payments on your mortgage and whether the lower monthly payments outweigh the potential long-term costs.
Closing costs and fees: Refinancing often comes with closing costs, which can range from 2% to 5% of the loan amount. Make sure you calculate these costs and determine whether the savings from consolidating your debt will offset these fees.
Impact on home equity: By borrowing more against your home’s equity, you’re reducing the amount of equity you have in your property. This can limit your financial flexibility in the future, especially if home values decline or you want to borrow against your equity later.
Risk of foreclosure: Refinancing to consolidate debt turns unsecured debts (like credit cards) into secured debt, with your home as collateral. If you’re unable to make the new mortgage payments, you risk losing your home to foreclosure, making this option more risky than other debt repayment methods.