Is A Debt Consolidation Loan Worth It?

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Is a Debt Consolidation Loan Worth It?

There are two debt consolidation scenarios that are gaining popularity in today’s economy:

1 – If you already own a home: a debt consolidation loan is typically where you trade in your lower-balance home loan for a higher-balance home loan.  You could then use the “cash-out” proceeds to pay off other debt. 

2 – If you are buying a new home: a debt consolidation loan is typically where you reduce your down payment and use a bigger mortgage on the purchase of your new home.  The extra money you have left over could then be used to pay off other debt.

Here are three questions you can ask yourself to determine if a debt consolidation loan makes financial sense for you:

  1. What’s my after-tax interest cost on each debt? For example, home loan debt may be tax-deductible while credit card debt is not.  Please reference IRS publication 936 and see a CPA or tax advisor for more details.
  2. What’s my “blended interest rate” before and after the debt consolidation loan? This is basically the weighted average interest rate you’re paying on all your debts combined.
  3. What will I do with the extra monthly cash flow? For example, if you roll in your car loan balance into the mortgage balance, you’d be spreading out your car payments over 30 years whereas your car loan would otherwise have been paid off in 3 or 4 years.  This might only make financial sense if you invest your extra cash flow or if you make extra principal payments on your mortgage.

 Please contact me for more information or to run the numbers for your specific scenario!

Comments (2)

William Feela
Realtor, Whispering Pines Realty 651-674-5999 No.

It can be worth is but the problem is most jsut add onto it after they consolodate

Jul 13, 2017 08:42 PM
Caroline Kuchinsky
Lower Rate Mortgages - Toronto, ON

If you’ve been struggling to pay off your multiple debts, debt consolidation option is the best for you. With vast amounts of debts from many lenders, you may end up spending a lot of cash to pay off all the loans. But when you consolidate all your debts, you are likely to spend little and make payments easily. You may also consult with specialists at Northcreek Financial about debt consolidation options as debt consolidation loans provide a sensible solution to individuals overwhelmed by debts such as credit card bills.

Apr 03, 2019 09:35 AM