I get hundreds of letters every month asking me if it’s good idea to consolidate one’s consumer debt to their mortgage to save money on interest. The idea of having one single debt and one manageable monthly payment at a good interest rate seems like a no-brainer. But will it save you money?
Since your mortgage is secured by the property, you’re likely to get the best possible rate on your borrowing. And having one payment to deal with sure takes less pressure off your money management skills. But not getting a statement for your line of credit or credit cards – having the debt “hidden” in your mortgage – can lead to a huge sigh of relief and not enough attention to the “consumer” part of the debt.
Having rolled your consumer debt into your mortgage, you shouldn’t relax and reduce your payments. That’ll just drag out the consumer debt for longer, erasing any savings from having a lower interest rate. If your total consumer debt payment (to get out of debt within 3 years) was $430 a month, and your mortgage was $1,550 a month, your new mortgage payment should be $1,980 a month at least till the consumer debt portion is gone.
Having a prepayment option can help get rid of that consumer debt faster too. You can make your regular monthly mortgage payment, and save your “consolidation loan” payments in a savings account, using your prepayment option to apply them once a year.
Remember that when you move your consumer debt, which is unsecured, to your home, you’re putting it at risk if you end up defaulting on payments. And once you’ve consolidated, for heaven’s sake, don’t look at your zero-balance credit cards as an opportunity to indulge. Cut up all but one card and cancel the extra accounts you no longer need because you’re done with debt!