Consolidating Debt - Refinance or 2nd Mortgage?

Homeowners who need to consolidate their high interest unsecured debts often wonder what is the best way of doing it. Is it best to refinance your first mortgage or take out a second mortgage or Home Equity Line of Credit?

Recent increases in the Prime Rate have made the Home Equity Lines of Credit much less attractive than they were a few years ago.

Taking advantage of refinance programs which allow you to consolidate your debts and modify the rate and term of your first mortgage, such as adding a minimum payment option, can allow you to really boost your cashflow or focus your finances. We have had customers who were paying 2500 a month in mortgage + credit card & car payments drop down to making one minimum payment of 1100 dollars a month after debt consolidation refinancing. In the same situation, a second mortgage would have only reduced their total monthly spending to 2150 a month.

A good mortgage broker can work out a cost analysis breakdown for you to show you the pros and cons of refinancing your first mortgage to consolidate your debt versus taking out a second mortgage or home equity line of credit to consolidate your debt. One advantage of a home equity line of credit is that many times you can obtain one without any closing costs at all. In the right situations this can be very beneficial to a consumer instead of paying the closing costs on a first mortgage, especially if there is any chance of not keeping the loan very long or moving.

Typically home equity lines of credit are reported as revolving debt if the loan amount is under $50,000.00 (check with your local lender guidelines). Most home equity lines of credit are also interest only payments that adjust on a monthly basis which may make things even more difficult for a homeowner over the long run.

In that case, refinancing your debts into one mortgage may make more sense than obtaining a high interest, fixed rate second mortgage or a home equity line of credit.

Often you can get a lower combined rate and a lower payment by refinancing your mortgage instead of getting a 2nd mortgage or a home equity line of credit. Your mortgage professional can make these calculations for you.

One thing to watch out for. Many home equity lines of credit will report on the borrower's credit report as revolving debt rather than mortgage debt. This can often cause a substancial detriment to a borrower's credit score. Feel free to call me and I can help you determine how your HELOC is reporting. If it is reporting as revolving account, you should insist that the lender report it differently or refinance out of it.