The Benefits of Refinancing A Mortgage

By Chris Blanchet

When it comes to consolidating debt by refinancing a mortgage, a lot of non-finance people will claim it to be a "bad" thing. After all, these people have probably worked very hard to pay their mortgage down and are now enjoying the fact that their shortened remaining amortization will make them among the few who are mortgage-free. Without a doubt, their hard work deserves recognition.

The truth is that a reduced amortization and large equity in the home are all nice and beautiful, but not while carrying a large consumer debt load. This is where refinancing a mortgage makes the most sense and we provide three key benefits right here. Of course, these are just the most obvious benefits and do not incorporate a longer-term strategy.

The first benefit is that consumer debt rates far exceed mortgage rates. Using the equity in a home to consolidate debt provides the lender will collateral and results in a lower rate. Refinancing a mortgage to pay out such consumer debt reduces the total cost of borrower for the term and since you owe this debt anyway, why not use the equity to get a lower rate? What can you do with the extra savings in interest costs?

Two. Consumer debt normally carries a higher monthly payment requirement than a mortgage payment. This is because mortgages can be amortized over decades and consumer debt typically has a much shorter repayment period. The result of refinancing a mortgage to pay out such consumer debt is an improvement to monthly cash flow. For example, a $50,000 consumer loan at 8.9% repaid over six years versus a $50,000 mortgage at even 5.75% amortized over 25 years will provide additional cash flow of $586.24. What would you do with an extra $586 every month?

Three is for simplicity. The average North American carries balances on thirteen different credit cards. This suggests that this average person is making thirteen different payments on a monthly basis plus a regular mortgage payment. By refinancing a mortgage, those thirteen different payments will get replaced by the lone mortgage payment. How will you spend that extra time?

Understandably, people do not intend on refinancing a mortgage so that they can carry it forever; the goal is ultimately to be mortgage-free. But carrying consumer debt for the sake of being mortgage-free is counter productive, especially when you consider the costs, payments, and time involved with carrying such debt. In terms of risks, they are the same; whether you have 80% equity in your home or 10% equity, if you stop paying that mortgage, your lender will foreclose. Therefore, it makes sense to use your equity to reduce costs and increase cash flow. With this in mind, refinancing a mortgage to repay consumer debt makes perfect sense.