With the many changes to the mortgage rules, regulations, and the declining property values there are probably less debt consolidation refinance mortgage loans being made today than previously. All things have changed concerning mortgage loans and the loan to value restrictions is one of those things. This is in fact a good thing for the consumer. That does not assert that refinances have not been at a high volume with the low interest rate that are available, but with the current market, it indicates there more loan restrictions and a lot of homebuyers have been able to refinance the first mortgage and sometimes the 2nd mortgage only.
During what has been called the Subprime era, just about anyone could obtain financing and buy a home and/or refinance adding in all of their debts on a refinance with 100% financing. A lot of this was the 80/20 loan to avoid mortgage insurance (MI). The ability to refinance all debts and consolidate, paying off all credit card debts, and installment loans on occasions. It was very convenient with the higher loan to values being allowed. The banks ran promotions during this time for buyers (who qualified) to get their HELOC (home equity line of credit). If there was room left on the equity line of credit after closing; the money was there to do as they wished. It became easy to get that 2nd mortgage or HELOC. It made it really easy to get that new furniture and other goodies to go with the new house; so the idea seemed quite approachable. Remember the investors who wrote the guidelines (Fannie and Freddie included) allowed this financing to occur.
The major problems came when; after five years these HELOC loans, which start off with interest only payment, were at full payment with a higher interest rate than their first mortgage. Now, there are two mortgage payments, and some people did not throw away those credit cards that were paid in full; and guess what? Now, there is credit card debt again; along with the two mortgage payments and in some instances; declining income or just plain debt overload.
Now that the downside has been articulated; can refinancing and consolidation help you? This is your home and there are questions one should ask. When you think about paying off credit card debts, installment loans, and refinancing the first and second mortgage; can this process assist me in becoming financially stable again? The answer is two-fold. It can under certain conditions. It can also over the long term create more problems than you had to being with.
What should a homeowner think about prior to consolidation?
Lenders want your business because that is what affects their bottom line. As a general rule, when an individual makes an appointment with the Loan Officer to discuss and complete an application; they will not tell you that the refinance to consolidate your debts is a bad move, unless of course you do not qualify. Why would this person shoot himself in the foot? He/she will not. This is not being critical of these persons; it is just the honest truth. He/she works on commissions and this is how they get paid. The question you must ask yourself; is this debt consolidation mortgage, actually going to benefit me over the long term?
Other considerations and questions to ask yourself before debt consolidation with your mortgage.
1. If I pay off all my credit cards; will I tear them up and close the accounts so that I do not charge on them again? Most people do not.
2. If I pay off my installment car note; will I make sure that I do not make a loan with my car (personal loan) as collateral?
3. Will I lower all of my payments by as much as 20%?
4. Will my income increase within the immediate future?
5. Could I make these payments as they are; if I budgeted and cut some of my excess spending?
6. How loan will it take me to pay off this new mortgage?
7. Can I go with a lower term to still pay off this mortgage at the time my prior mortgage was paying off?
8. Do I plan to sale and move within the near future?
9. Will I lower my interest rate by at least 2 percentage points? *very important
10. Is my residual income sufficient for emergencies?
11. Can I make this new mortgage payment; should one income person not have a job?
12. Can I continue making my payments now; if one income is gone?
13. If I took my credit card debt and make a personal loan at the bank to pay them off; would it benefit me just as much as refinancing my home mortgage to consolidate? *You would probably need collateral if the amount is great than 5K and sometimes even then.
14. Will I obtain a fixed rate mortgage so that my payments do not fluctuate with interest rate changes? And lastly.
15. After all considerations; is rolling all of my debt into my mortgage going to be beneficial to me for the long term?
No one can answer these questions but you, the homeowner. Being wise about your financial position and problems is sometimes not the easiest pursuit. It is easy to look for the easy way out without thinking about the long haul. The mortgage consolidation refinance can be beneficial if you are adamant about not making further debts; possibly obtaining a part time job and make it a priority to lower all other debt obligations and of course save for your future.