Let’s explore each of these.
A private mortgage is a preferred source of debt consolidation financing when 1) the financing requirement is short term, 2) there is going to be an opportunity in a year or less to apply for cheaper financing; 3) the debt consolidation needs to occur quickly.
In the first case, a borrower may be coming into some additional funds in a matter of months and will pay off the debt completely at that time. A private mortgage can be arranged to be open after a number of months, so its possible to not incur any prepayment penalties on the back end of this debt restructuring action.
In the second case, the borrower may very well be able to qualify for bank financing right now for a debt consolidation, but due to strained credit cannot get a bank or institutional deal that is significantly lower than a private mortgage and with better prepayment privileges.
If the borrower believes that he or she can improve their credit in less than one year from specific credit repair actions, then it may make sense to utilize a private mortgage for the short term debt consolidation requirement and then refinance again, potentially without prepayment penalty in a year or less, at better rates and terms.
In the third case, once again the borrower can qualify for bank or institutional debt consolidation financing, but there isn’t enough time available to the borrower to complete a bank type transaction before creditors take action against him or her, or some additional cost is incurred.
Because of the speed in which a private mortgage can be put into place, it can be a preferred choice instead of risking a bank application taking longer than the time you have available to complete the debt consolidation action.
The other side of the coin is where a private mortgage is the only option for debt consolidation.
This will occur when the borrower with bad credit cannot locate any type of sub prime institutional financing option that is better than private money.
In some cases, there are “B” lender options that are comparable to private money in terms of rate, but much more restrictive when in comes to term and prepayment privileges.
For instance some sub prime products are offered at three and five year terms with no prepayment privileges.
Regardless of a private mortgage being preferred or not, debt consolidation through this means has the ability to both reduce monthly debt servicing requirements as well as your average cost of capital.
From a cash flow perspective, all bank or institutional debt consolidation solutions that involve mortgage financing will have amortized principal and interest payments. With private mortgage financing, most loans are interest only so even though the interest rate may be higher, the lack of principal repayment during the loan term and actually reduce the debt servicing requirements.
From a rate point of view, if you are consolidating credit card debt, a private mortgage interest rate can be half of what you are paying monthly to the credit card company.
Because of the wide variety of private mortgage lenders out there as well as potential debt consolidation scenarios, it makes a great deal of sense to be working with a private mortgage broker who has considerable experience helping his or her clients with debt consolidation requirements.