Homeowners with a lot of debt and bad credit often try a refinance consolidation loan in order to put their debt on their mortgage, which typically has a lower interest rate than other forms of debt. While refinance consolidation loans can be beneficial for some homeowners, it might not be the best option for someone with bad credit looking to get rid of the debt.
Normally a refinance consolidation loan is going to be beneficial for someone who wants to group their debt under a smaller interest rate and is going to be able, as well as, responsible enough to pay on a higher mortgage amount. Essentially refinancing and paying off debt with money received back from equity built in one’s home simply is placing all that non-mortgage debt, that you paid off with your home’s equity, onto your mortgage, since you still have the same amount of debt.
This can cause unsecured debt, which is now grouped into your mortgage, to become debt that, if not paid, can cost someone their home. Essentially, adding more money onto your home loan might cause some to be strained in their mortgage payment which could cause them to become delinquent or worse.
Homeowners with bad credit, also, may not get a great rate if they refinance, so it would cause more harm than good. Homeowners that refinance their home to pay off debt may not have the best financial practices, so unless a homeowner is living within their means, budgeting, and saving, then using their home’s equity to pay off their debt may not be the best idea.