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:
- 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.
- 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.
- 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!