Consolidating Your Debt With a Mortgage Refinance Can Cost You Big!
February 24th, 2009
Most people incorrectly believe that consolidation their high rate debt into a lower rate mortgage, is saving money, but lowering your rate and/or payments isn’t saving money. Saving money is saving money.
What most people do when they consolidate their debt is really just moving their debt around, so you take your credit card debts, your car loans, your personal loans, your overdraft lines of credit, all your different debts, mostly non-tax-deductible debts, and combine them with your mortgage. Now there are certainly some advantages here. You’ll usually get a lower rate than those other debts, lower monthly payments and of course the fact that the mortgage is most likely tax-deductible.
When you do this consolidation you think, I’m saving money. I’m paying less than what I was paying before, so I’m saving money, right? You’re getting these nice tax deductions, you say to yourself, I’m in much better shape than I was before. For example, you had a $3,000 overall monthly payment between mortgage, credit card, car loans, etc. and now you’re paying $2,000. It’s a $1,000 savings, and that’s great!
Here’s the reality, if you consolidate all this debt, and you lower your payments by $1,000 a month, and you continue with the same spending habits, you’re going to end up right back where you were before. What ends up happening, is you have $1,000 extra to spend each month, that’s lot of money. So you start thinking I can afford that new TV I always wanted! I’ve got to get that big plasma 55-inch TV at 5,000, I’ll just finance that on a credit card, for $300 per month. Or what about that Mercedes, you always wanted, so that’s $1,000 a month, so you think I can afford it now that I’m saving $1,000 per month. Maybe a vacation, get some gifts for the kids, the next thing you know you didn’t change your spending habits at all and you’re right back where you were, in the same hole.
What you need to do is sit with a professional mortgage planner and create a debt management plan. Not someone who just consolidates the debt, and says okay, well, now we’ve consolidated all your debt, have a nice day. I’ll see you in about a year from now when you’ve jacked your credit cards back up, and I have to refinance you again. That’s not what the goal is. The goal is to actually put together a plan so that doesn’t happen. Yes, you should see your mortgage planner a year from now, but that’s for an annual review. Again, lowering your payments isn’t saving money. Saving money is saving money, and that’s what a debt management plan should be all about.
So, what you should do is take your credit card, your car loans, your personal loans, your overdraft lines of credit, all that non-tax deductible debt, and consolidate it, because that does make sense. You should consolidate that debt into a new mortgage, which should have a lower overall monthly payment. Now, what should you do with that lower payment? Well, first of all you need to stop spending the way that you’re spending. You need to create a budget. Your mortgage planner should be able to help you with that. Look at your overall spending habits and see where you can cut back. Then, what you want to do is address where that extra money is going to go, get your house paid off, create a retirement account, set up a college fund for your kids or grandkids, etc. The key is to have a plan!
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Marc Savage is a Nationally Recognized Mortgage Expert and Host of Your Home Your Money on AM 540 WLIE Saturday Morning at 10AM. Marc specializes in helping homeowners who have had a bankruptcy or other credit challenge find payment relief, achieve financial security, restore their credit and receive peace of mind. He is also a founding member of the National Association of Responsible Mortgage Lenders. Visit his website at a target=_blank target=_new href=http://www.yourhomeyourmoney.org.comhttp://www.yourhomeyourmoney.org.com/a for more information or call him direct at 516-326-5310.
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