With interest rates approaching their pre-election lows, a lot of my clients have inquired about consolidating their high-interest debt. Two debt consolidation scenarios are gaining popularity in today’s economy:
1 – If you already own a home: a debt consolidation loan is typically where you trade in your lower-balance home loan for a higher-balance home loan. You could then use the “cash-out” proceeds to pay off other debt.
2 – If you are buying a new home: a debt consolidation loan is typically where you reduce your down payment and use a bigger mortgage on the purchase of your new home. The leftover funds could then be used to pay off other debt. Here are three questions to see if a debt consolidation loan makes financial sense for you:
- What’s my after-tax interest cost on each debt? For example, home loan debt may be tax-deductible while credit card debt is not. Please reference IRS publication 936 and see a CPA or tax advisor for more details.
- What’s my “blended interest rate” before and after the debt consolidation loan? This is the weighted average interest rate you’re paying on all your debts combined.
- What will I do with the extra monthly cash flow? For example, if you roll in your car loan balance into the mortgage balance, you’d be spreading out your car payments over 30 years whereas your car loan would otherwise have been paid off in three or four years. This might only make financial sense if you invest your extra cash flow or if you make extra principal payments on your mortgage.
About the Author
David Reznikow is a licensed loan partner at Fairway Independent Mortgage. A Brookline native and BHS graduate, Reznikow is currently a Newton resident but has remained part of the Brookline community. As a Brookline Chamber of Commerce Director and business member Reznikow has had the opportunity to add to the vibrancy and diversity of the business community while helping to raise funds for local charitable organizations through many Chamber initiatives. Both Reznikow’s parents have businesses in Brookline, still live in the home where they raised three children, and can often be found playing with their grandson, Cameron, at Dean Park.