If you own a property on which there is a mortgage loan, you can replace it with a new debt consolidation loan that allows you to get additional liquidity to pay off any other current loans and use the remaining sum for different needs, for example for to renovate a home or for other family needs.
In this guide on mutual debt consolidation we will see when it is worthwhile to replace the old mortgage at more advantageous rates, we will analyze the risks of asking for greater liquidity that could increase the interest to be repaid to the bank and we will understand how to obtain the best mortgage to consolidate all the loans in course in a single monthly installment that is more convenient and sustainable for your personal finances.
Debt consolidation mortgage: the guide
- What is debt consolidation loan?
- Practical example
- What is mortgage consolidation debts more liquidity
- How to get the best mortgage debt consolidation
- What debts can be consolidated into a single loan?
What is debt consolidation loan?
Debt consolidation is a loan that replaces existing loans with a single loan, to which you can add additional liquidity necessary for your personal needs, with the advantage of paying a single monthly payment and having only one debt on terms more convenient.
The debt consolidation loan formula was introduced by the decree law 212/2011 – Urgent provisions on the over – indebtedness crisis – to avoid the excessive and dangerous indebtedness of families typical of recent years.
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The advantages of debt consolidation mortgage
Debt consolidation is an excellent solution to avoid over-indebtedness, a condition of those who are paying different loans with various institutions and are no longer able to support the many financial commitments. In fact, the main advantage of applying for a loan for debt consolidation is precisely the sustainability of the monthly payment, which compared to the many loans that are being paid, offers the possibility of having a single mortgage at a more affordable rate from a credit institution..
Consolidating your debt allows you to extend the duration of the loan and have a lighter monthly commitment. With one installment it will be easier to realize what your debt is and it will be easier to pay the installment regularly.
Let’s take a practical example to understand if the debt consolidation loan is worthwhile: let’s suppose we have a loan with an original duration of 20 years with a residual debt of 100 thousand USD at a fixed rate of 3% and a monthly payment of 720 USD. About 15 years remain to be paid. Over the years, a loan has also been granted for the purchase of the car, whose current debt amounts to 6,500, with a monthly installment of 200 USD and a duration of another three years, and another loan contracted a couple of years ago for sudden family needs that have an installment of 150 USD a month for another 5 years and a residual debt of 7,500 USD.
Considering that the apartment in which the family lives needs renovation work for around 15,000 USD and the loans in progress have an interest rate higher than 7%, the family in question could find it convenient to consolidate all the debts in progress in a single loan with a more competitive rate, in line with the drop in rates in recent years, without having to ask for other loans that would make it difficult to balance the family budget, and above all lightening the monthly payment to improve one’s quality of life.
In any case, with a good debt management plan, the amount saved could be allocated for future reductions in the residual capital and reduce the interest payable to the bank. To conclude our example, the new loan would amount to 130,000 USD, which for a duration of 20 years, at 1.50% fixed rate, the monthly payment would correspond to 627 USD monthly, much less than all previous commitments.
The disadvantages of debt consolidation mortgage
Not always refinancing debts is the best solution for those with many commitments. If, for example, some loans that you want to pay off are nearing expiry, on which many interests have already been paid, it is advisable not to include them in the counting of the new mortgage, but to pay them off with your own economic strength or by following the natural deadline to avoid dragging the small residual debt in a larger sum in which other interests would be paid.
As we have seen, debt consolidation is often an inevitable choice as it may have become difficult to sustain all financial commitments, but on the other hand it is important to know precisely what the new debt will be and how much the new loan will cost.
Debt consolidation mortgage is offered at higher rates than the best mortgages on the market today. As a rule, the loan to merge all debts costs up to one percentage point more, but it is also possible to obtain a subrogation for more liquidity at more affordable rates.
Unlike the subrogation loan, which does not have the costs of a bank investigation, expert opinion and notary, the refinancing is a new contract with another bank and for this reason it is necessary to bear all the typical expenses when a new loan is started, including notarial deed, substitute tax, appraisal and bank investigation. In any case, in the event of economic unavailability, it is also possible to include these amounts in the context of the new loan.
What is mortgage consolidation debts more liquidity
Replacing the loan by consolidating debts plus liquidity is a valid alternative to pure refinancing because it limits the costs of opening the new loan. This is an operation proposed by a few credit institutions and allows paying the ancillary expenses that are due to the borrower only for the excess liquidity. In fact, as regards the share of the transfer of the pure residual debt, the ancillary costs will be borne by the new credit institution, while the additional liquidity will be borne by the borrower.
Before subscribing to any type of mortgage it is essential to rely on a professional who is able to advise the most suitable solution and who carefully evaluates the opportunity and feasibility of the operation, informing the client about all the costs and interests they will pay more.
How to get the best mortgage debt consolidation
To obtain this type of loan, the applicant, in addition to having an adequate income that can sustain the installment of the new commitment, must own a property to be pledged in favor of the bank that grants debt consolidation and which has a value of at least 20% of the loan amount. In fact, all the banks proposing the consolidation of loans grant a maximum amount of 80% of the value of the property.
Furthermore, it is essential to have regularly paid all the loan and mortgage installments and therefore not to be included in the central financial risks as a bad payer.
What debts can be consolidated into a single loan?
The commitments that can be absorbed into the new consolidation loan are personal loans, loans for the purchase of property, the sale of the fifth and of course the mortgage on which there is already the ‘mortgage, which will be extinct for a iscriverne in favor of the credit institution that will provide the refinancing or the subrogation for more liquidity.
To find out what the best debt consolidation offers are and to have an immediate feasibility of the transaction, you can request a free consultation with our experts.