Basic Terminology: Debt Consolidation

A debt consolidation loan is almost always a refinance where high interest rate debt is paid off with a lower interest rate mortgage. Purchase loans rarely allow any additional payment other than the home purchase, but refinance loans are often directed towards allowing a borrower to pay off their high interest rate credit cards, auto loans and home equity loans with a lower interest rate first or second mortgage. For most borrowers it makes sense to payoff an 18+% interest rate credit card balance by rolling that debt into a home mortgage, but this does leave you with secured debt rather than unsecured debt. What that means is that your debt is now backed by your home, so if you miss too many payments the lender will take your house. With a normal credit card you can only forfeit the items you have purchased (in most cases), rather than the home you have been paying off for possibly the last several decades. If you are certain that you will make all payments and you just want a lower interest rate then a debt consolidation refinance may be right for you. If you have trouble making your payments on time and miss payments occasionally then you should stay away from consolidating your loans, since a few missed payments could cost you your home. Consolidating loans is a great idea if you can obtain a lower overall interest rate and lower your monthly payments. However, if you are in a situation where you might miss a few payments you should avoid using your home's equity to back your unsecured debt. It might cost you your home and your financial stability.