Fun with Numbers - Mortgage Consolidation

Why consolidate your debt into your Mortgage? Well let's see...

If you consolidate $50,000 worth of debt and put it into your mortgage (for fun let's assume that your mortgage has $200,000 left at a rate of 4% on a 25 year amortization) then you go from a mortgage payment of $1,052.04 to a mortgage payment of $1315.05. So you are paying an extra $263.01.

Now just to keep it simple let's assume that your $50,000 worth of debt is all credit cards and you were paying the 3% minimum every month. Your payments on the cards would have been $1,500 per month. So you have just reduced your monthly bills by $1,236.99! Wow! You are well on your way to financial freedom. Of course in truth you should be putting some of that extra cash into your mortgage to shorten the amortization period. Most lenders allow you to prepay at least 15% of your mortgage per year and many allow 20% but in reality few exercise this option and many will use this extra money for Johnnys Hockey or the new car.

Now this is where it gets interesting. At $200,000 if you paid your mortgage every month at that interest rate for all 25 years, then the total interest paid at the end of 25 years would be $115,612.12. (Yup there's alot of profit in financing homes.) But at $250,000 then your total interest paid is now $144,515.15. A difference of $28,903.03. So in total you would have paid $78,903.03. Where as if you paid your credit cards back directly at a rate of 21% interest at $1,500 per month it would take you 51 months (4 years 3 months) and your interest would be $25,698.12 for a total repayment of $75,698.12. So for just over $3,000 difference you can afford to eat more than mac and cheese every night and if you're smart, start accelarating your Mortgage payments by exercising your prepayment option and shorten your amortization period (which of course means you would payback even less in interest). Now that's assuming rates stay at 4% for the full 25 years, which of course they will not. Still, consolidating debt through your mortgage can make a whole lot of sense. Just don't wait until the debt gets too far behind because when your credit is affected the banks will no longer offer you 4%. You'll start to look at rates anywhere from 5% to 14%, dependant on how far you've let this debt slide and now the savings aren't so great.