What Is a Debt Consolidation Refinance Program?

Debt consolidation refinance programs allow homeowners to capitalize on equity.

Debt consolidation programs allow homeowners to capitalize on real estate equity to pay down existing debt. Although these programs can reduce short-term interest costs and consolidate debt payments, homeowners should carefully consider the downsides before refinancing.

Function

In a debt consolidation refinance, a homeowner refinances real estate to obtain additional funds. If the property value exceeds any outstanding mortgage balance, the homeowner can use the difference, known as equity, to pay other, higher-interest debt.

Benefits

According to the financial website Rate Empire, a debt consolidation refinance allows homeowners to save money by using a low-interest mortgage to pay high-interest debt. In addition, homeowners can deduct mortgage interest from federal taxes, so homeowners may also enjoy a lower tax bill.

Considerations

Financial columnist Liz Weston notes that, despite the lower interest rate when compared to other debt, the longer term of a mortgage loan can equate to more interest paid. Some homeowners who leverage home equity find themselves owing more than the home's value if real estate values decline.

References

• FHA Mortgage Bank: FHA Loans Can Simplify Your Debt
• Rate Empire: Debt Consolidation Loan
• Ask Liz Weston: Refinancing has Downside - More Debt