Debt Consolidation is finance-speak for wrapping a bunch of other loans into a single, larger loan. For example, a homeowner can pull money out of a property they own—usually via a cash out refi—and uses those funds to payoff other debt (e.g. credit cards, auto loans, student loans, etc). The resulting debt load is likely to have a lower weighted interest rate and/or be stretched out over a longer period of time. Compared to a traditional mortgage, virtually all other debt charges far higher interest rates over a much shorter period of time. Thus, debt consolidation is a powerful tool to payoff the expensive debt and “wrap” it into a single mortgage- often saving borrowers hundreds/thousands per month, and tens of thousands over the long-term.

Is Debt Consolidation always a good idea?

Answer: No.

• If the rate of the new umbrella loan is > than the weighted avg of the existing debt, what’s the point?

• If the cost of originating the new loan > the savings over a reasonable amt of time.

• If you’re refinancing a mortgage and you’re more than 7-8yrs into the loan, the reduction in interest needs to be significant.

*A common objection to this strategy is when the total interest expense over time exceeds what someone would pay if things were left as-is. The answer to this grievance has it’s roots in a much bigger and very important group of subjects. Until I can write an article about it, the short answer is: Irrelevant b/c of inflation, erosion, and opportunity cost.