Access to credit has created a credit crisis in North America. The concept of keeping up with the neighbor’s purchases, even whenindividuals don’t have the money to do so, has destroyed personal and financial lives of families. Credit card debt is at an all time high, even as consumer savings rates are slowly climbing. A debt consolidation mortgage is an option to turn external debt into a mortgage loan, making it easier and faster to pay the loan off.
The way these loans work is they typically take a second position on the mortgage loan. The original mortgage loan is always first lien position. The second mortgage consolidates the debts of credit cards, credit lines, car loans, or any type of credit line outstanding into one loan payment, usually at a fixed rate at a far lower overall monthly payment. This is usually incredibly beneficial, but does have its downsides.
A debt consolidation mortgage benefits consumers immensely. By paying off all outstanding credit cards, it improves the credit score usually. The reason for this is the ratio of credit line available to credit line used goes down, showing more access to credit that is not being improperly managed. The other benefit is monthly payments go down because instead of having 5 $100 payments for example, you may only have one payment of $300. These second mortgages typically will have a fixed rate, which allows for more adequate financial planning and removes the fear of your rate going up on the credit line causing more financial strain. Lastly, one payment per month is often easier to remember and pay on time, which raises the credit score as well.
The negatives have to do with the rate on this loan. When a borrower is seeking a debt consolidation loan, they usually are already behind on payments and have a lower credit score due to high credit balances. This means the fixed rate to pay off all these debts will usually not be very low. Certain consolidation loans can actually lower a credit score as well because they are red flags to future creditors.