I recently had a friend tell me she was considering refinancing her mortgage to consolidate credit card debt and reduce her interest rates from over 20%. On the surface this sounds like a great idea. Why wouldn’t it make sense to pay less interest? When I looked at the loan documents she shared with me, I realized this was far from a great deal. Her interest rate would be increasing only about 1% on the mortgage, but this would result in almost $30,000 of additional interest over the life of the loan, not to mention the $3,000 in closing costs… and all this just to roll $15,000 of high interest credit card debt into a “low-rate” mortgage.

That means she was ready to pay $33,000 to reduce the interest rate on $15,000 of debt! That’s essentially 220% interest!

As soon as I calculated the damage the loan would do, I quickly called my friend to tell her to put the breaks on and cancel the application NOW! This wasn’t anywhere near a the good deal she thought she was getting and I couldn’t watch a good friend go down this damaging road.

Sadly, the loan officer didn’t help her understand the impact of the refinance, and although she would have been able to consolidate the credit cards, she wouldn’t have been addressing the root of the problem – overspending! If she had gone through with the loan, she probably would have found herself in the same situation a short time later by racking up more credit card debt, but now with a higher mortgage payment.

After explaining why she shouldn’t go forward with the refinance, I offered to help her figure out a budget to manage spending and payments, as well as a debt repayment plan using a 0% fee balance transfer card that offers 15 months 0% interest (Chase Slate) and debt snowball.

Be sure to check back in for updates on her progress!

If you’re struggling with debt and considering a mortgage refinance to consolidate the debt and reduce interest rates, make sure you understand the terms and expenses that come along with the new loan. If you have a hard time understanding, please ask for help so you don’t end up costing yourself thousands more than you have to pay.

While debt-consolidation refinance loans are right for some situations, it can also be a very costly method of consolidating debt that has many other alternatives that can often be a better fit.