In order to combine or consolidate existing debt from multiple loans into one loan, you have to have either a new loan for a large enough amount to pay out the existing debts, or you have to have an existing loan, like a line of credit with approved funds that are unused and which can be deployed towards paying down or paying out other debts.
With smaller debt consolidation amounts, say under $100,000, it is potentially possible to get new unsecured personal debt consolidation loans to provide the capital necessary for the consolidation to occur. But in order to qualify for this type of financing, the borrower’s credit would have to be very strong, he or she would have to be able to show a strong cash flow for debt servicing, and the borrower would also likely have to have a personal net worth several times higher than the total debt financing they are carrying.
Using mortgage refinancing is typically a much more effective debt consolidation strategy, provided that you have enough equity in your home to generate additional mortgage financing that can be used to retire or pay down other debts.
Mortgage loans are also going to be cheaper than any unsecured financing option on a similar situation as the risk to the lender is going to be a lot lower in the event of loan default.
And if the borrower’s credit and cash flow are strong, there is even the possibility that they may be able to improve upon the base rate that was in effect for the old mortgage that would need to get paid out. So not only can the cost of interest be lowered by eliminating higher cost sources of short term debt that you want to consolidate, but it can be further lowered by securing a lower mortgage rate, provided that is available in the market at the time of refinance, and the borrower’s current mortgage position will not incur prepayment penalties that would wipe out the benefit of the new mortgage rate.
Mortgage refinancing also provides you with the opportunity to realign your debt repayment schedule over a longer period of time. Its quite likely that the debt you want to consolidate is going to require a shorter term repayment period than a new mortgage, so with a lower overall rate and a longer period of repayment of loan principal, you have the ability to realign your monthly debt servicing requirements with your available cash flow.
There can be many different scenarios and financing options to consider when trying to consolidate debt through mortgage refinancing, which is why it can be very beneficial to work through an experienced mortgage broker who can assist you in working through the mortgage refinancing and debt consolidation options that are the most relevant and beneficial to your particular situation.