Second Mortgage

When you consolidate your debt with a refinance it is very easy to make mistakes that cost you thousands or tens of thousands of dollars.

A mortgage lender will evaluate your current credit report and often decide which of you consumer debts to pay off. These consumer debts can include: credit cards, student loans, bad debt, car loans, etc. If there is enough equity in your refinance they may be able to pay off all of this debt.

Because mortgage lenders are using your credit report it is usually hard to hide your debts from them. A mortgage lender may insist on paying off some debts – bad debts, co-signed debts, and your current debts.

Bad Debts

Check your credit report before you begin the refinance process. Your credit report will list all of your credit lines for the past several years. This will include all the credit lines you currently have open, ones that have been closed, and ones that you have been delinquent on.

Your delinquent credit may include items that you were late on, as well as bad debts that were sent to collections. Your credit report may list collections debt with lenders or companies you do not recognize. These companies are often debt collection agencies that have purchased your debt from your original creditor. These may often be small bills, such as old cell phone bills. They can also be very large bills.

If you can resolve these before you begin the debt consolidation process you will be better off. Mortgage lenders will often want to pay off all of your bad debts to help improve your credit.

There are mortgage lenders, however, that do not require this. They may put a cap on paying off old debts, so that you get to keep more of your money.

Co-Signed Debts

A mortgage lender may also require that co-signed debts be paid off. These can include co-signed debts for large items such as auto loans. This can be a very large surprise to borrowers. Paying off a car loan on a car that someone else drives may not be very fun.

Since you are a co-signer on a debt the lender may still require the debt to be paid off. You are still legally and financially liable for the debt, even if someone else is making payments on it. Check in advance with your lender or mortgage broker to see if you can avoid this situation. 

Current Debts

These are also debts that mortgage lenders like to pay off. This includes credit cards, but can include items such as student loans. Your student loan information on your credit report may be out of date.

The lender may send off a check to pay off your student. Any overpayment on old debts will be directly refunded to you. This can often take a long time with debts such as student loans.