Should I consolidate my debt for peace of mind?

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Question: There’s a clichéd image when it comes to debt: a harried man or woman sitting at a desk, drowning in stacks of bills, head in hands, face a mask of anxiety. But anyone who has felt the sting of a hefty debt load can likely relate — owing money can be a stressful and unpleasant business.

While my husband and I don’t have mountains of debt weighing us down, it still sometimes feels like a shocking change from our debt-free days when we first entered the working world. Fortunately, neither of us were saddled with any student debt back then, we rented our apartment, and my car at the time was a family hand-me-down that we just had to keep filled with gas. Going from that carefree, debt-free existence to living with a mortgage, a line of credit, car payments and a host of bills every month has added a whole level of worry that we knew nothing about back then.

Since our mortgage is up for renewal, we are considering consolidating some of our debts into one big loan (namely, our mortgage). From my perspective, the idea of having one single debt and one manageable monthly payment at a good interest rate seems to make sense both financially and psychologically. But is consolidating the right way to go for both your mental health and your pocketbook?

Answer: It can be, says Bruce Sellery, author of Moolala: Why smart people do dumb things with their money (and what you can do about it). “There’s a dollars perspective and an emotional perspective,” he said. “Because your mortgage is secured by the property, it may be that you can get a better rate than the rate for your line of credit. So, say your line of credit is prime and your mortgage is prime minus sixty basis points, numbers-wise it’s better.”

He adds: “Emotionally it might just feel like there’s less hanging over you, because you don’t get the statement for the line of credit and the mortgage, you just get the statement for the mortgage. And I don’t relate to my mortgage as a debt.”

That’s a sentiment I agree with. I once had a financial adviser who wasn’t fantastic at making me money, but he did say something that resonated: “Don’t consider your home an investment, consider it a place to live.”

Paying a mortgage feels reasonable and responsible to me, while the other debts just feel like bothersome flies swarming around my head. Mr. Sellery thinks that the psychological benefits of having only one debt can count for a lot, although he warns that there are pitfalls you can fall into when you consolidate. For one, he says that even if you roll your line of credit debt into your mortgage, it’s important to keep a line of credit in case of emergency. And be sure your payments don’t go down just because you’re only making one.

“Say your L.O.C. payment was $200 a month and your mortgage was $1,400 a month, in the combined world, your payment should be $1,600 a month,” he said. “Don’t all of a sudden start slowing down the amortization of your mortgage.” Mr. Sellery also suggests making sure you have a pre-payment option in case you have extra money to throw at your mortgage.

“Sometimes you will get a lower rate if you give up that privilege, but I recommend having it because if you get a surprise $10,000 bonus, an inheritance, or anything, you can just slam it on the mortgage without penalty.”

Investopedia.com has even more warnings, particularly for people who have substantial debt problems. Firstly, watch out for debt consolidation companies: “Debt consolidation companies generally present themselves as nonprofit organizations but this should not lull you into believing they are working for you. Like all participants in the financial community, they are intent on making money from the situation. It’s best to explore the details of debt consolidation only in conjunction with the help of an independent financial adviser.”

As well, Investopedia points out the risks of moving unsecured debt (like a line of credit or a car loan) to your mortgage, which is a secured debt. While there are consequences for defaulting on an unsecured loan, if you default on a secured loan, you risk losing your home.

And the Wall Street Journal’s Smartmoney warns against looking at your new single-debt status as a licence to spend.

“Whatever you do, don’t look at your zero-balance credit cards as an opportunity to indulge. Cancel those suckers instead!”

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