Determine if a debt-consolidation refinance is right for you

The last couple of years have brought about trying times for many of us, including COVID-related challenges, job loss and general financial strain. While the days of rate reduction mortgage refinances may be behind us for the time being, there is an underutilized type of mortgage refinance that may be able to provide some financial relief: A debt-consolidation refinance, also known as a cash-out refinance.

This loan program provides homeowners with the opportunity to lower their overall debt burden by combining the higher interest rate debts with the lower interest rate mortgage debt. It’s helpful for individuals and families carrying high interest debt on credit cards, personal loans or even a HELOC.

Here’s an example of how this type of refinance works:
Sue owns a home worth $650,000, with a current mortgage on the property of $300,000 at a 3.75% interest rate. Sue experienced some financial strain related to a job loss in early 2020 when COVID became a global pandemic.

Since then, Sue has obtained a new job and is doing well with her current income stream, but she is struggling to pay off the $50,000 in credit card debt she accrued while out of work. With an interest rate of 17%, her credit card debt is costing her $703 per month in interest expense alone. Sue had considered consolidating her debt into her mortgage, but since her mortgage has an interest rate of 3.75%, and the current interest rate on a debt consolidation refinance is around 5.75%, she didn’t act.

Given Sue’s current mortgage interest rate, is Sue making the right decision in refraining from applying for the refinance? Let’s take a closer look.

Current payment:


Sue’s current principal and interest payment is $2,223 per month and current interest expense on her credit card debt is $703 per month. These two debts combined total to a monthly payment of $2,926 per month.


New payment:


If Sue went ahead and consolidated her credit debt and mortgage into a new mortgage with a loan balance of $350,000 and an interest rate of 5.75%, her new principal & interest payment would come out to $2,043 per month.


In contrasting these two scenarios, it’s clear that Sue would save herself $883 per month by moving forward with the debt-consolidation refinance. Not only would her monthly payment drop, but she’d also be chipping away at the principal balance of the total debt each month, unlike her current scenario where she’s making interest-only payments on her credit card debt.


If Sue’s position sounds similar to yours, please reach out to your local Alpine Bank mortgage lender to discuss your situation and goals and to determine if a debt-consolidation refinance might be a sensible solution.


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