Often, people who need debt consolidation advice will shy away from refinancing a mortgage in order to pay out large amounts of consumer debt. These debtors will normally be entering their mid-life stage, or just coming out, and will have taken an aggressive repayment plan with their mortgage, resulting in a much-shorter amortization. They will be mortgage-free sooner. Great work!

However, carrying a mortgage and making payments when the remaining amortization is low while simultaneously carrying large consumer debt makes no sense. In fact, this is where refinancing a mortgage makes the most sense. Since the equity in your home can secure better rates, even if it means giving up some of that equity, it is to your financial benefit to incorporate consumer debt. Here are three of those benefits.

First off, interest rates on consumer debt are normally way higher than rates people pay on mortgages. This is because real estate is still considered the best form of consumer collateral. Refinancing a mortgage to pay out consumder debt means lower interest costs over the course of the repayment period. Since people owe this debt regardless of whether it is secured by a mortgage or unsecured, the only difference is that consumer debt gets paid with the mortgage and not with mailed credit card or loan statements. What will you do with the interest savings?

Number two is that the monthly payments on consumer debt are normally much higher than on mortgages. For this reason, refinance a mortgage to improve cash flow is a common occurrence. To illustrate, consider a loan of $50,000 at a rate of 8.9% with a term of 6 years compared to a mortgage of the same amount at a rate of 5.75% over a 25 year amortization. The gain in cash flow is $586.24 because the mortgage has a longer repayment period. Now, what would you do with your extra cash flow every month?

Third is for the sake of simplification. Since the typical North American will have a balance on thirteen different credit cards, the typical North American is making thirteen different payments to credit card companies and one mortgage payment. By refinancing a mortgage, that would leave just one payment. Now what would you do with that extra time!

Understandably, people do not intend on refinancing a mortgage so that they can carry it forever; the goal is ultimately to be mortgage-free. But carrying consumer debt for the sake of being mortgage-free is counter productive, especially when you consider the costs, payments, and time involved with carrying such debt. In terms of risks, they are the same; whether you have 80% equity in your home or 10% equity, if you stop paying that mortgage, your lender will foreclose. Therefore, it makes sense to use your equity to reduce costs and increase cash flow. With this in mind, refinancing a mortgage to repay consumer debt makes perfect sense.