You open your financial spreadsheet with a pit in your stomach, a why-is-it-so-hard-to-break-even-every-month kind of pit. But you’re a responsible person, and adulting means you manage your money and pay your bills, so here you are, figuring it out. Doing what you have to do. Taking a deep breath, you scan down the list of expenses: there’s the car loan (still a few years to go), there’s the big medical bill from the unexpected procedure last year, and there’s the longer-than-you-wish-it-was list of credit card payments.
You rub your eyes, thinking: I’m making progress on reducing debt, chipping away month after month, but not fast enough. Not nearly fast enough. The interest rates are too high. It feels like you’re trying to fill a bucket with water, but the bucket has holes in it. You can’t ever fill the debt-hole fast enough, because interest rates mercilessly steal a huge portion of your payments. You sit back in your chair. If only there was another way to get out of debt so I could stop pouring money into that debt-bucket and start moving forward financially.
If you’re a homeowner, there is another way to tackle your debt, and it’s an option worth considering now that mortgage rates are falling: Refinancing your mortgage. Refinancing your mortgage with a lower rate and better terms can be a powerful tool for consolidating debt so you can start making faster progress toward building healthy finances. Let’s evaluate the cost to refinance mortgage terms and consider how a debt-consolidation refinance could help you reach your financial goals faster.
How Can Refinancing Help You Consolidate Debt?
When you refinance your mortgage, you pay off your existing mortgage with a new loan, a loan with different terms, like a lower interest rate, the length of the loan and number of payments, and your loan balance. A debt-consolidation refinance allows you to borrow more than your current mortgage balance. You use the extra money to pay off your existing debts, which then consolidates all of your debt into a single payment, your mortgage. You might use the extra money you borrowed to pay off a variety of debts, including (but not limited to):
- Car loans
- Medical bills
- Credit card bills
- Other consumer debts
Once you pay off those bills using the money you borrowed through your refinance loan, all those debts come together as one debt: your mortgage. Consolidating debt simplifies your financial life tremendously. Instead of paying a bunch of bills every month, each with a different due date and interest rate, you pay one monthly payment to cover all your debt. Not only do you save money by folding your higher-interest debts into a lower-interest payment, you eliminate significant amounts of stress and overwhelm.
What Are the Benefits to a Debt-consolidation Refinance?
A debt consolidation refinance can have multiple benefits. Here are a few:
You simplify your monthly payments.
When you’re juggling multiple monthly debt payments, each with a separate due date, it’s all too easy to miss a payment. And when you miss a payment, you may face a penalty, which only makes that debt mountain rise higher. Consolidating all of your debts into a single monthly payment makes it easier to manage your finances and pay bills on time. This benefit alone can make it worth the cost to refinance mortgage terms.
You lower your interest rate for debts.
Credit cards can have interest rates as high as 15-20%, and if you get behind, that interest can quickly lead to a staggering increase on the amount you owe. For example, if you have a credit card that charges 20% interest, for every $100 you owe on that card, you could be paying $20 a month in interest! (We know. It’s awful. Let’s all take a moment to breathe into a paper bag.) The interest rates for mortgages are typically much lower. As 2024 nears a close, rates are hovering above 6%, and many sources predict rates will fall below 6% in 2025. Consolidating your consumer debt under a lower rate can add up to huge savings over the lifetime of your loan.
Not only does a refinance lower your interest rates on consumer debt, it can also lower the interest rate on your mortgage too. For example, if you purchased a home in 2022, your interest terms may be up in the 8 to 9% range. Lowering your rate to today’s terms could significantly reduce your monthly mortgage payment. Those savings could make it worthwhile to pay the cost to refinance mortgage terms.
Convert bad debt to good debt.
While consumer debt is often called “bad debt” because of the undesirable interest rates and terms, a mortgage is typically considered “good debt” because you build equity and worth over time. A debt-consolidation refinance allows you to convert bad debt to good debt.
Refinance multiple times.
You may be hesitant to refinance now, thinking, But wait. If rates are predicted to drop further, shouldn’t I wait to see how low they go? You can lower your rates and consolidate your debts today without missing out on lower rates in the future. If rates continue to fall, you can refinance again in six months.
Enjoy tax benefits.
Homeowners can deduct the interest they pay on their mortgage from their taxes. Because you cannot deduct interest payments from credit cards and other consumer debts, folding your other debts into your mortgage payment could give you a larger tax break. A tax professional can help you determine what deductions you qualify for. Again, those savings can take the edge off the cost to refinance mortgage terms.
What Else Should I Consider as I Weigh My Refinance Options?
Because there is a cost to refinance mortgage terms, you’ll want to evaluate the big picture. Here are a few questions to consider:
Am I confident I can pay my new monthly mortgage payment under the new terms?
A mortgage may be considered good debt, but keep in mind that your home acts as collateral for your loan, so you’ll want to be confident you can handle the new monthly payment. Do your homework, crunch the numbers, and seek financial guidance from a mortgage professional to make sure this choice makes sense for your situation.
Will my house appraise for a good price?
As part of the refinance process, you’ll need to get your home appraised to determine its current value. Appraisers will consider the state of your local real estate market, recent sales in your neighborhood, and any improvements you’ve made to the property. Your lender will use your home’s appraised value to determine how much equity you already have in your home and to help determine the terms of your refinance loan.
Is the cost to refinance mortgage terms worth it?
When you refinance your home, the new loan will come with fees and closing costs, just like your original home loan did. These costs often range from 3 to 6% of your loan principal. Lenders determine the costs, and they will take multiple considerations into account, including your credit score and location. Closing costs usually include fees like these:
- Appraisal costs
- Underwriting fees
- Attorney fees
- Lender’s origination fee
- Government recording costs
Typically, closing costs add up to several thousand dollars (or more, if you have a luxury home). However, you can look into a no-cost refinance loan, which folds the cost of the refinance into your loan. Again, it’s important to do the math and figure out how long it will take for the savings you gain from consolidation and a lower interest rate to cancel out the cost to refinance mortgage terms.
Is Now a Good Time to Refinance Your Home?
If you’re ready to take advantage of falling interest rates and consolidate your debts under better terms, consult a mortgage professional to investigate your refinance options today.