March 17, 2010 at 8:10 AM
There are benefits to debt consolidation refinance for some homeowners. It all depends on your current amount of credit card debt, financial situation, credit score and other factors as to whether a mortgage refinance is the best way for you to address your debt.
There are a variety of reasons homeowners consider a mortgage refinance to do a debt consolidation. Some are sinking in credit card, medical or other unsecured debt. By refinancing, you can combine all outstanding unsecured debt into one significantly lower monthly payment. You reduce your monthly payments, clean up your credit report and are maybe even able to set aside savings. Consolidating debt into a mortgage refinance can even improve your credit score.
Some very important dynamics lenders take into consideration are your credit score, current income, debt to income ratio and other factors that are critical to loan approval. Many who are struggling with debt also have less than good credit. With less than good credit in today’s economy, it is difficult to obtain a loan. Depending on your income and other financial considerations, if your credit score hits 680 or above, you should be able to obtain approval for a mortgage refinance.
Creating concern for many industry analysts, the Federal Reserve removed its program to rescue Fannie Mae and Freddie Mac mortgage-backed securities (MBS) on March 31, 2010. The program strategically kept interest rates below five percent in order to encourage economic recovery. Freddie Mac reported that in one week, however, interest rates jumped from an average of 4.99 percent to 5.08 percent the last week in March 2010.
If your current mortgage interest rate is lower than current mortgage rates, then it may or may not be to your advantage to do a mortgage refinance. If it is higher, regardless of the reason you are refinancing, it should be to your advantage to consolidate your unsecured debt. It all depends on your credit score, how much unsecured debt you have and the interest rate you are being charged for each account.
Before diving into a mortgage refinance, find out your credit score. Get your free credit score. To get a free copy of your credit report please visit the only federally regulated website with trully free credit reports from the 3 major credit bureaus AnnualCreditReport.com
A credit score of 680 or above is the ideal; although, some borrowers are able to obtain approval for a decent mortgage rate on a refinance with a lower credit score. Don’t get stuck on the credit score, but know that it is important. Once you obtain your credit score, and find that your current interest rate is higher than the industry average, look at the interest rates you are paying on your credit card accounts.
Sometimes, regardless of the interest rates, it is worth it to do a mortgage refinance to eliminate the many high monthly payments to credit cards and other unsecured debt. If you decide to do a mortgage refinance, pay off your unsecured debt and close out the majority of your credit card accounts. Only keep one or two major credit card accounts open – ones that you’ve had the longest that have the largest credit limits. Use them on occasion to charge a small amount that you pay over a period of several months. This ensures you have ongoing credit activity to keep your credit score high.
The one pitfall that many who have decided on a mortgage refinance succumb to is to take out new credit. It only leads to the same situation that you just rescued yourself from, so don’t fall into this trap. Stay as debt-free as possible with minimal charge activity. If you follow this principle, you’ll see yourself achieving financial gain, increasing your credit score to a number you can be proud of and managing your debt where it’s comfortable for your income.