T J Madigan asked:


Many homeowners consider the possibility of using a mortgage to consolidate existing debt. If you have already repaid your mortgage, you can take out another primary mortgage. Taking out a second mortgage is an additional option to consolidate debts for those homeowners who still have a primary mortgage. How sound of an idea is it to use a mortgage to consolidate your debts?

You should never use a mortgage to consolidate your debts if the interest rate for your debt is lower than the interest rate you would have on a mortgage. This would mean that you are paying a higher cost for the mortgage than you were paying on your debts. This is not a sound financial decision. There is a slight exception to this rule. If you your current debt has some kind of introductory rate that will expire and leave you with an interest rate that will be higher than that of the mortgage, then a mortgage to consolidate debt is worth considering.
There are other factors, in addition to interest rate, that you should take into account when you consider using a mortgage to consolidate your debt. When you have less than 20% equity in your home, you are required to pay private mortgage insurance. If these premiums plus the amount of your mortgage without consolidating your debts is the same as or less than the amount of your mortgage with consolidating your debt, then you do not incur extra costs by consolidating. However, if the private mortgage insurance causes your monthly payment to increase, then consolidation is costing you.

A lot of homeowners make the mistake of thinking only about the monthly payment of their mortgage in addition to what they are paying on their debts without consolidating in comparison to the mortgage with debt consolidating. Take into account that when you consolidate debt with a mortgage, you are paying it over a longer period of time, which accounts for the lower monthly payment.

Before you apply for a mortgage, you should find out your credit score. Chances are if you are having trouble with credit, then you have a less than perfect credit score. Remember that your credit score will affect the interest rate and terms you receive on a mortgage. If your credit score is below 600, the likelihood of you receiving favorable loan terms is low; not impossible, just low.

Keep in mind that when you use a mortgage to consolidate your debt, that the debt is not eliminated. Instead, you are transferring your debt from one form to another.

The best way to determine what it will cost you to consolidate your debts using a mortgage or pay them straight out is to use a mortgage calculator as well as a debt repayment calculator. Logic can be flawed, but numbers never lie. There are calculators available that will assist you in both of these calculations. Use the calculator to test out different loan amounts and mortgage rates to get a good picture of how much consolidating will cost you.

Adam Jasa asked:


Which is right for you? That depends on many factors, mainly your current and projected financial situation. There are many misconceptions about these two options and in this article I will explain the positives and negatives of each.
Credit Consolidation is to combine outstanding debts into one or several loans. The important thing to remember is that with a consolidation you are not reducing the principal debt amount you owe. In most cases your principal debt will increase at first because of closing costs or transfer fees. A Credit Consolidation can be a good move but only if the new loan is at a lower interest rate than the individual debt items. Over the years I have advised hundreds of clients on how to get out of debt. It seems that initially most people want to consolidate their debts to not only reduce interest but to make their lives easier by making only one payment. I recommend that if you get approved for a consolidation loan to only accept if the interest rate is substantially lower than the loans you are consolidating. It makes no financial sense to consolidate loans to make your life easier. This is especially true if you refinance your mortgage to pay off credit cards. Remember, only consolidate for a lower interest rate and take all closing costs into consideration. Another potentially useful situation to consolidate is if you are struggling with minimum monthly payments. In some cases you can buy yourself some time if you’re able to consolidate and have a substantially lower payment, although this will generally prolong the amount of time it takes to actually pay the debt off.

Debt Settlement is also known as Debt Reduction. Debt Settlement is different than Credit Consolidation because the goal is to reduce your principal debt amount. This is done through negotiating with your creditor to lower your debt amount based off your specific financial hardship. If you are not in a hardship the program will not work because the creditors will have no reason to lower your debt amount. What qualifies as a hardship? As always, this depends on your situation. Some people are already behind and can’t afford their minimum monthly payments; this is definitely a financial hardship. If you’re current but are in danger of falling behind in the near future, you also might qualify for Debt Settlement. Debt Settlement is usually the fastest way to get rid of unsecured debt besides bankruptcy. The main tradeoff is that it’s not good for your credit score. If you have decent credit, your payment history will be negatively affected which is enough to pull your credit score down into the “poor” range. In order for Debt Settlement to make sense for you, the benefit of paying off your unsecured debt in less than three years must outweigh the fact that your credit score will be compromised. Once the debt is paid off you can begin to rebuild your credit.