Refinancing: The Power of Debt Consolidation

By Jessica Sommerfield

Having so many loans to pay every month can be overwhelming. In most cases, consolidating your loans is the best way to solve this problem. Debt consolidation involves combining all your high-interest loans into one low-interest loan. This will help you save some money besides making your loan payment easier. 

Today, mortgage rates are low, and that’s when refinancing to consolidate debt makes sense. A home equity loan or debt consolidation refinance is the best way to save some cash. But before you rush to refinance to consolidate your debts, it’s best to understand what this strategy involves.

What is debt consolidation?

Debt consolidation makes it easier for borrowers to repay their loans. It makes loan repayment more affordable because it lowers interest rates. If you have several loans to repay, you’ll find it a great challenge to pay each loan separately at the month’s end. Debt consolidation eliminates this problem. The trick here is to take a low-interest loan and use it to clear all your high-interest loans. This means you’ll only have one loan to pay at the end of every month.

High-interest loans are normally from unsecured sources like personal loans and credit cards. No collateral is needed for an unsecured loan, which is why they attract high-interest rates. 

Consider debt consolidation if you have a predictable and steady income and you aim to make your repayment more affordable and easier.

The process

If you want to lower your monthly payment rates, you must identify a loan with low rates to replace your high-interest loan. The loan with the lowest rate you can think of for a homeowner is your primary mortgage. If you can get a mortgage loan with an interest rate below 4 percent, you can use it to pay your credit card loan with an interest rate of 18 – 25 percent.

How is this possible?

If you want to consolidate your debts, you can use refinancing. You do this by taking a home loan that exceeds your mortgage balance. The excess amount will be cashed out at closing, and you can use it to repay your high-interest loans, so you remain with only a single loan to pay.

You can also use the cash out from refinancing to pay off major obligations such as medical bills and student loans. However, if your goal is to become debt-free as quickly as possible, your high-interest debts should be your main focus.

Remember that you’ll incur closing costs when refinancing, so you have to look for a loan with an interest rate low enough to enable you to save on your interest payments. Check out the PHH mortgage reviews on how you can benefit more from refinancing to consolidate debt.


To use a mortgage refinance to consolidate your debts, there are certain conditions you have to meet. The requirements vary and will depend on the cash-out type you are applying for and the loan type. To qualify for refinancing, you’ll need over 20 percent equity of your current property equity untouched. 

For instance, to get 10 – 20 percent in cash, you need 30 – 40 percent equity. Another condition you must meet is that your credit score should be 620 or more. If your credit score is 600, you can get refinancing from FHA. But you must remember that once you take a new FHA loan, you’ll have to pay an upfront fee and monthly insurance fees. These will increase your new loan’s cost, lowering your savings margin.


Your choices include a Home Equity Loan or a Home Equity Line of Credit (HELOC). 

HELOC is another way of tapping into your property’s equity. HELOC is a revolving loan whose interest rate is adjustable. It depends on the principal amount, but there’s a margin added. HELOC is like a credit card but uses your home as collateral. You can use it to get a loan and only start repaying when you have an outstanding balance.

Thank you for reaching about when refinancing to consolidate debt makes sense. But you have to remember that issues to do with finances are best left in the hands of experts. Better consult a financial expert if you don’t know how to go about refinancing to consolidate debts.