If you have already repaid your mortgage, you can take out another primary mortgage.

Taking out a second mortgage is an additional option to consolidate debts for those homeowners who still have a primary mortgage.

How sound of an idea is it to use a mortgage to consolidate your debts?

You should never use a mortgage to consolidate your debts if the interest rate for your debt is lower than the interest rate you would have on a mortgage.

This would mean that you are paying a higher cost for the mortgage than you were paying on your debts. This is not a sound financial decision.

There is a slight exception to this rule.

If you your current debt has some kind of introductory rate that will expire and leave you with an interest rate that will be higher than that of the mortgage, then a mortgage to consolidate debt is worth considering.

There are other factors, in addition to interest rate, that you should take into account when you consider using a mortgage to consolidate your debt.

When you have less than 20% equity in your home, you are required to pay private mortgage insurance.

If these premiums plus the amount of your mortgage without consolidating your debts is the same as or less than the amount of your mortgage with consolidating your debt, then you do not incur extra costs by consolidating.

However, if the private mortgage insurance causes your monthly payment to increase, then consolidation is costing you.

A lot of homeowners make the mistake of thinking only about the monthly payment of their mortgage in addition to what they are paying on their debts without consolidating in comparison to the mortgage with debt consolidating.

Take into account that when you consolidate debt with a mortgage, you are paying it over a longer period of time, which accounts for the lower monthly payment.

Before you apply for a mortgage, you should find out your credit score.

Chances are if you are having trouble with credit, then you have a less than perfect credit score.

Remember that your credit score will affect the interest rate and terms you receive on a mortgage.

If your credit score is below 600, the likelihood of you receiving favorable loan terms is low; not impossible, just low.

Keep in mind that when you use a mortgage to consolidate your debt, that the debt is not eliminated. Instead, you are transferring your debt from one form to another.

The best way to determine what it will cost you to consolidate your debts using a mortgage or pay them straight out is to use a mortgage calculator as well as a debt repayment calculator. Logic can be flawed, but numbers never lie.

Bankrate.com has calculators that will assist you in both of these calculations. Use the calculator to test out different loan amounts and mortgage rates to get a good picture of how much consolidating will cost you.

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For a lot of people this can be a very attractive option.

The interest rate on the mortgage periodically adjusts based on an index.

Because of the varying interest rate, borrowers may notice their payments changing over time.

Adjustable rate mortgages are sometimes confused with graduated payment mortgages. With a graduated payment mortgage the interest rate remains fixed while the payment amounts change.

With adjustable rate mortgages much of the interest rate risk is transferred from the lender to the borrower. Borrowers benefit when interest rates on the mortgage fall. On the other hand, borrowers lose out when interest rates rise. Usually the loans are available when fixed rate mortgages are more difficult to obtain.

Key Terminology
Index - the guide used by lenders to measure changes in the interest. Each adjustable rate mortgage is linked to an index.

Margin - the part of the interest rate from which the lenders profits. The margin plus the index rate is the total interest rate. While the index will change throughout the duration of the adjustable rate mortgage, the margin will not.

Adjustment period - the period between interest rate adjustments, usually denoted in the format of 1-1. The first number is the initial period of the loan for which the interest rate will remain the same. The second number is the adjustment period. It shows denotes the frequency at which the interest rate can be adjusted.

Loan Choosing Tips
The index is one of the most important considerations in choosing an adjustable rate mortgage. Even though you don't have control over the specific index that is used by a particular lender, you can choose a loan and lender according to the index that will apply to the particular loan in which you are interested.

A lender you are considering can give you an indication of the performance of the loan in the past. The ideal loan is one that has an index that has historically remained stable. As you consider loans and lenders, make sure you also consider the margin rate that the lender offers.

Many borrowers wonder about the benefits of an adjustable rate mortgage since the payments can increase over time. In most cases, the benefit of an adjustable rate mortgage comes into play when the interest rate of the ARM is lower than the fixed rate mortgage. The possibility of a payment increase is sometimes inconsequential. This is true if you do not plan to occupy the house for an extended period or if you expect your income to increase over the life of the loan.

Avoid Negative Amortization
Negative amortization is a key watch-out when you are choosing an adjustable rate mortgage. This can occur when a particular loan as a cap on payments that keeps them from covering the amount of interest on the mortgage. As a result, unpaid interest is added to the loan, causing the amount of the loan to increase, even though you are making payments.

You can start out with a positive amortization on your adjustable rate mortgage but end up with a negative one due to interest rate increases. The best way to avoid negative amortization is to avoid adjustable rate mortgages that have a payment cap.

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