Use Your Home to Consolidate Debt but Choose a Lower Amortization Instead of a Lower Payment

If you have accumulated a lot of debt and you have some home equity, your home is a very affordable tool that you can leverage to negotiate a low rate consolidation loan.

In many cases homeowners who refinance their homes to consolidate debt will blend the debt into their first mortgages. Depending on the new mortgage amortization, your new mortgage payment may not increase at all and because the debt has been eliminated you will immediately free up new cash flow.

The danger here is that the debt still exists only it’s been transferred over to your home. If you are 5 years into a mortgage that was originally amortized over 25 years and have 20 years left, refinancing your mortgage amortization back out over 25 years puts you right back to step one and with an even bigger mortgage.

Your bank or broker may even quote you a payment based on the maximum amortization. Don’t be afraid to ask your mortgage broker to quote you the payment based on different amortizations so that you can compare.

Here is an example based on a consumer with a mortgage that has a 20 year amortization left on it, a balance of $220,000, a 6% interest and a monthly payment of $1,315 per/month. If the same consumer was also carrying $25,000 in debt with monthly payments totalling $1,200 per/month the consumers total monthly payments would be $2,515.

If the first mortgage was refinanced to $245,000 to pay off all the debt at the same rate based on a 25 year amortization the new monthly payment would be $1,288. The debt would be completely wiped out and the new monthly mortgage payment is almost the same as what the consumer had been paying on their existing mortgage.

The same mortgage that is paid off all the debt based on a 20 year amortization would have had a monthly payment of $ 1,480 per/mo and $ 1,808 monthly mortgage payment based on a 15 year amortization. The 15 year amortized mortgage makes the most financial sense because you have reduced your total mortgage repayment to 15 years and have still reduced your monthly payments by $700 per/month.

This is just one example of how you can use your home to pay off debt while making effective financial decisions that consider the whole picture. For more information about how to use your home to consolidate debt and choose a lower amortization instead of a lower payment please visit www.gtamortgagematters.com.