Debt consolidation through a refinanced home loan can offer a tempting promise -- the exchange of your maxed-out credit cards for a clean slate. The trouble is, consolidating debt with a refinance doesn't reduce it by a cent. It just moves your balances to your mortgage lender.

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Industry experts put the failure rate of debt consolidation programs as high as 80 percent. If you're part of the four out of five who take out these loans and don't pay them off, you could be worse off. The better you understand debt consolidation -- what it can do and what it can't do -- the less likely you'll make a bad financial move.

Understanding debt consolidation home loans

The critical thing to understand about consolidating your credit card debt with your home mortgage is that doing so extends the repayment period, which can greatly increase your overall interest paid. So a debt consolidation refinance could cost you a lot more, even if your interest rate is much lower.

Try this exercise with an online mortgage calculator and you'll see:

  • If you have $10,000 of credit card debt at an interest rate of 15 percent annual percentage rate (APR), a typical payment of 3 percent of your balance equals $300. It would take you almost 18 years to pay it off and cost you $6,937 in interest.
  • Let's say you take out a cash-out refinance at 5.5 percent to pay off your cards. The lower rate drops your monthly payment to $57, but you're spreading out your payments over years -- which increases your total interest cost to $10,440!

Of course, if you pay the same amount each month to aggressively chip away at your principal, the lower home loan rate will save you a bundle. But if you don't direct extra money toward your debt repayment, you'll pay more in the long run.

The best of intentions

I can hear it now: "Gina, if I consolidate my debt, I'll just pay it off faster! Then I will save money!" OK, I believe that you fully intend to do this. But people with credit problems may not be in the habit of denying themselves goodies. Know your own weaknesses: If not constrained by the terms of your loan, will you really make that extra payment, month after month, and not use your credit cards to buy things you don't earn enough to afford?

Give debt a one-two punch

Debt consolidation can work, of course, but it needs to be part of a total financial plan. Here's an example of how you might handle balances like the one above:

  • Consolidate your credit card debt with a cash-out refinance at 5.5 percent.
  • Instead of your old payment of $300, your new payment is $57. Put $100 a month into savings for emergencies (or a celebratory splurge… when you are debt-free, that is), then pay an extra $143 a month to pay interest and reduce the principal on your new mortgage.
  • If spendthrift ways are at the root of your debt problem, close out your credit cards, keeping one for emergencies and for transactions that are very inconvenient without one (such as hotel reservations and car rentals). Don't carry the credit card with you if you're prone to impulse buys; use cash or a debit card instead.

If you follow this plan, guess what? Your $10,000 in credit card debt is paid off in four years and nine months, and you pay only $1,386 interest. Now that's a smart solution.