By BankingMyWay Staff

Debt is on everyone’s mind these days. With job losses, bills, and underwater mortgages wreaking havoc on finances across the country, some have been forced to file for bankruptcy or lose their homes to foreclosure. In February 2009 alone, 223,651 foreclosure filings were made according RealtyTrac, a 60% increase from the same month in 2008. Consolidating debt is one method to lower monthly payments and avoid defaulting on financial obligations.

Deciding whether or not debt consolidation makes sense for your financial situation requires you to calculate exactly what you’re paying each month, and how much you’ll have to pay in the future. These sometimes-complex calculations are made easier with BankingMyWay.com’s Loan Consolidation Calculator. This tool allows you to input the balances on your outstanding debts as well as interest rates and monthly payments. By entering in the terms of a potential consolidation loan, you can generate a report to see how much you could save monthly, as well as how much the consolidation loan would cost you or save you in total interest paid.

There are several ways to consolidate debts—use a low interest credit card, take out a personal loan or refinance a mortgage. The goal is to pay off existing debt with one loan at a lower interest rate. But thanks to the current credit crunch, it’s very difficult for consumers to obtain new credit, as even those with high credit scores are facing obstacles. Refinancing a mortgage may be the most practical way to consolidate debts in this turbulent economy.

In order to use a mortgage refinance as a debt consolidation tool, you must have enough equity in your home to pay off your outstanding debts. For example, if you have $30,000 worth of non-mortgage debt, you need to have at least $30,000 worth of equity in your home. These days, many lenders are requiring you to maintain 10-20% of equity in your home to protect them and you against the falling home prices, so you’ll likely need to have more equity than you plan to use.

It’s important to note, however, that a debt consolidation refinance doesn’t always make sense in the long run. If your debts will be paid off in a few years with your current monthly payments you may be sacrificing years more of indebtedness to save on your monthly payments. How your consolidation loan is structured makes a big difference.

Consider this example: John has a 30-year mortgage for $200,000 at 6%. For the last 10 years he’s paid $1,200 a month on his mortgage. He’s accumulated $60,000 in equity through principal payments and appreciation. John also has $10,000 in credit card debt at 15% interest and he pays $400 a month on it.  He also has a new 60-month auto loan for $20,000 at 8% that he pays $405 a month on. John’s current monthly debt obligation is $2,005. If John takes out another 30-year mortgage for $200,000 at 5% and uses his equity to pay off his existing debts, his monthly payments will go down to $1,074, a savings of $931 each month.

In this example, however, John has also incurred an extra $59,550 in interest charges and has extended his mortgage by 10 years. If, on the other had, John had chosen a debt consolidation refinance with a 15-year term, he would have still saved $423 a month and the new loan would save him $42,277 of interest. His mortgage would also be paid off 5 years sooner. When deciding if debt consolidation refinance makes sense for you, take all options into consideration.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.