The biggest misunderstanding about debt consolidation: a lower monthly payment is not the same as saving money.
Why it happens
Total interest depends on two things: the rate and how long you carry the debt. Consolidation lowers the rate, but rolling a card balance into a 25-year mortgage can stretch it from a few years to decades.
An illustration
Round numbers, for illustration only: $40,000 at about 20% paid off at $1,000 a month costs roughly $26,500 in interest. The same $40,000 at 6% over 25 years costs roughly $37,000 in interest, despite the much lower rate. See the full example.
How to keep the savings
- Keep paying close to what you paid before. Direct the difference to the mortgage as a prepayment or higher payment.
- Use a shorter amortization on the consolidated amount, if your lender allows a separate portion.
- Make annual lump-sum prepayments within your mortgage’s privileges.
- Track the consolidated amount as its own goal.
See paying off consolidated debt faster.
When a lower payment is the right goal
If cash flow is the emergency, such as after a job loss, lowering the payment can be the right first step. Just plan to increase payments once things stabilize.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.