Four things you should know before reunifying debt on your mortgage

by Alex Musk

It is true that debt reunification is not as common today as it was a decade ago. It is also true that the use of this type of tool is greatly rationalized; even so, it is convenient to know in-depth what debt reunification implies and how it works.

At a time when capital mortgage contracting picks up slightly so far in 2017, the operation around mortgage loans continues to be much less frequent and more complex than 15 years ago. At the time of the greatest presence of mortgages, the products around mortgage loans were many, very abundant in terms of supply, and highly contracted. Debt reunification was one of these products.

What is mortgage debt reunification?

For personal finances, debt reunification can become a useful tool. However, this option has been treated almost like another standard financing model, which has led to a situation in which credits have been extended in excess, making the initial costs very expensive.

A reunification of debts is a type of financial operation in which the different financial credits are unified into one, in this case, around pre-existing mortgage loans. What this does is to unify the rest of the credit debt in the largest loan, generally the mortgage. In this way, with the mortgage as an initial credit, repayment terms can be extended, and even financed capital to be able to settle the rest of the debts.

This can also occur when two mortgages are reunited into one, although it is more infrequent and has to do with times when one of the two mortgages is close to being amortized.

What you get with debt reunification is generally a lower monthly cost than the sum of all financial debts. That is, the sum of everything we pay in loans will be reduced by unifying them into one. There is no scale by which we can say what the real reduction percentage is; it is usually a sensible reduction; that is, it can be noticed in the pocket and obviously come in very handy immediately to our accounts.

Technically, the benefits of this product are based on introducing financial debt, for example, in a personal loan, at around 15% interest, within a financial debt such as a mortgage with much lower interest. Seen this way, it may seem like a very interesting operation. However, it obviously has chiaroscuro to take into account.

Why should we be careful with debt reunification? In the first place, we must understand that the advantage of reducing the monthly payment by grouping credits does not appear by magic. This advantage arises when the repayment terms of the mortgage loan are increased; that is, we transfer debt from a personal loan to, for example, five years and convert it into debt for the rest of the duration of the mortgage, for example, 20 years. If we take this into account, we will soon recognize that in the long term, this operation is not at all advantageous. In fact, the partial amortization of each of the financing operations included in the reunification will multiply in cost over the years; that is, we are going to pay much more than we would have paid, assuming the repayment terms of the personal loans branched out in the mortgage.

Even so, there may be those who say that this type of operation, this debt for life, can be interesting if they reduce the monthly installments. This is highly debatable, first of all, because our capacity for new financing needs is going to be drastically reduced. In other words, it will be very complex in the long term to obtain another type of financing when we want, for example, financing the purchase of a vehicle or even a second home.

But in addition, we must bear in mind that we are facing a really expensive operation that implies very high expenses. These are processing costs formalization, but also, in many cases, the credits that we are going to reunify may have expenses for early cancellations. To this, we must add that the modification in the mortgage will bring with it notary fees, records, and taxes, while the opening of a new mortgage where the reunification operation will be carried out also brings with it more expenses.

In order to be able to face all this, it is generally proposed to us to increase the amount of the final loan; that is, we are not only going to finance what we owed, but we will need to increase the financing to be able to pay what we owed. Obviously, what this does is increase the principality of debt over a very long period of time, that is, more interest.

Commissions on reunified mortgages

If you have ever consulted in the last five years the possibility of reunifying a mortgage with your financial institution, you will probably have verified how it is not an operation that is especially interesting for banks. It is true that not so long ago, the banks themselves proposed and, somehow, closed their eyes to authentic barbarities such as the incorporation of the purchase of vehicles, valuables, etc., into mortgage loans. All this is part of a truly unfortunate recent history in relation to the use of mortgage loans, but it is part of the past.

As far as possible, the financial institution, if it is the one that owns the loans that we owe, will try to negotiate them separately, or even, in any case, will try to unify personal loans separately from mortgage loans. In some cases, it is possible that we are offered this type of solution from the bank itself, but it is not the most frequent.

Another option is to go to financial intermediaries or companies specialized in this type of financial tool. In this case, we have to know that in addition to all of the above, the commissions that are usually handled can be between 3% and 5%. The great advantage of going to intermediaries or specialized companies is that their offer is usually quite polished and is generally more competitive than that offered by financial institutions by the system.

Another important thing that we do not always keep in mind when we make decisions such as reunifying loans in a mortgage is that all our financial debts will become part of the mortgage loan, and therefore, the guarantee of all our financial debts will become the home. Obviously, this can be the case even from a personal loan, but in this case, we are directly assuming the payment of a mortgage that, if neglected, will be executed immediately following the usual banking procedures.

Do you know what a reverse mortgage is? in this post, we show it to you

In summary about debt reunification

Really, debt reunification should be the last tool in case of having tried all kinds of operations and negotiated solutions with financial creditors.

The best way to approach a reunification of debts in a mortgage is the conviction that the reduction of the monthly costs of the financial debt is going to allow us to remake our economy so that in a short period of time, we can make partial amortizations of the set of the mortgage. Even this is not a great solution either since amortizations will probably bring with them some costs in the form of Commission for early cancellation, but even so, it is usually cheaper than letting the loan live over time.

In short, the monthly reduction of the installments that the reunification of debts implies brings with it an increase in the total amount of money that we are going to pay, of the interests, and of the costs, tying us for many years to debts that were conceived in the short term, like personal loans.

So always keep in mind these four factors that we mentioned before launching to reunify your debts. Remember that you will pay less monthly but for much longer. Your debt will increase, and it is not obvious that it will be simpler to deal with it. We hope this little warning will help you and that you keep it in mind when you find yourself in this situation and consider unifying your debt.

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