The Bottom Line On Consolidating Debt Into Your Mortgage
As Credit Counsellors, were often asked, can you consolidate debt into mortgage payments? The thought is that in doing so, you will reduce the overall interest you have to pay on your individual debts and free up potentially hundreds of dollars every month.
Its a win-win, right? Not so fast.
Sometimes, consolidating debt into a mortgage can cost you. But first, lets take a look at just how it works.
Crunch Your Numbers Before Tapping Into Home Equity
All that said, there are also tradeoffs to consider. Cashing out the equity in your home means youre essentially using up that equity. Youre also increasing your mortgage debt and most likely extending the length of your loan. These factors can vary depending on your situation, but theyre generally what borrowers can expect.
There are many other factors involved in choosing your strategy for consolidating credit card debt into your mortgage. For example, many lenders require you to leave 20% equity in your home after cashing out. They will also want to ensure that your new monthly payment works within your debt-to-income ratio. If you want to explore what leveraging your home equity could mean for you, crunch the numbers on our refinance calculator.
When youre ready for personalized advice, contact us onlineortalk to one of our experienced mortgage experts atto learn more about your options.
*Average monthly debt payment reduction figures based on Mr. Cooper refinances from June 2021May 2022 in which a customer paid off at least one non-mortgage debt. Comparison between total minimum monthly payments before and after refinance. Individual results will vary.
Other Debt Consolidation & Debt Help Options
If youre hesitant to use up some of your home equity to pay off your debts, thats understandable. Fortunately, there are a number of alternatives to getting a debt consolidation mortgage you may want to consider. Our debt consolidation calculator can give you a rough idea of how long it will take you to pay off your unsecured debts at their current interest rates using different repayment strategies. The calculator also provides different debt relief options that may be available to you, rather than consolidating your debt into your mortgage.
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The Pain Points Of Consolidating Debt With Mortgage Loan
Unfortunately, theres nothing on the market that doesnt come with a couple of drawbacks and other weak points that you need to keep in mind.
In the case of a mortgage refinance, youll have to keep a close eye on your closing costs. Some leaders and loan providers can charge huge amounts of money in fees when youre refinancing a mortgage to pay off debt.
Consequently, youll need to compare the closing costs with your total interest savings on the consolidated debt. You want a healthy difference between the two numbers, with the interest savings much bigger than the closing costs.
Also, youll have to make peace with the fact that now youre dealing with secured debt instead of unsecured debt.
The reason why credit card is considered unsecured is that its not actually backed by collateral. On the other hand, mortgage debt is secured by the house itself.
This means that if you failed to make your payments, your lender can take your home. Its an increased risk to you as the borrower, and thats why youre getting lower interest rates.
If you happen to take the cash-out-refinance route, youre intentionally increasing your mortgage balance by the amount of debt youre aiming to pay off.
Thus, your monthly mortgage payments could see a hike, depending on the terms of the loan and the rates that you agreed on.
Use Your Homes Equity Wisely
Remember that you reduce the ownership percentage of your home whenever you access your homes equity. This means that youll either pay more in interest over time or youll need to make more payments before your mortgage matures.
You should never access your home equity for everyday expenses. This can quickly trap you in a cycle of debt. Instead, use your home equity for large, one-time expenses like covering medical bills or consolidating credit card debt. Consider your financial situation to make sure you can handle your new payments before you sign on your new loan. From there, stay on top of your payments and avoid falling back into debt.
- Standard home loan rates are available if we can get you approved with a major lender.
- Your repayments may be more affordable if we can secure lower home loan rates.
- You may be able to improve your cash flow and savings position.
- You may be able to reduce stress and manage your debt more effectively.
- You can prevent creditors from pursuing you for funds and protect yourself against the risk of bankruptcy.
The cons:
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How Debt Consolidation Works
Debt consolidation should make your debt payments more affordable each month.
John Sweeney, head of wealth and asset management at Figure, explains: The goal is to pay off higher-interest debt with a lower-interest source of borrowing. And its generally good advice to pay as little interest as possible on the debt you hold.
High-interest debt typically comes from unsecured borrowing sources, like credit cards and personal loans.
Debt consolidation is worth pursuing if you have steady and predictable income and want to make your monthly payments more affordable
Michael Bovee, debt management expert, Resolve
Unsecured debt means the lender has no collateral to recoup losses if you default on the debt.
Its easy to get in over your head with multiple high-interest payments going to various lenders each month, especially when you have a lot of credit card debt.
Consolidating your debt by rolling your outstanding loan balances into a lower-interest mortgage can simplify matters and save you a lot of money.
Debt consolidation is worth pursuing if you have steady and predictable income and want to make your monthly payments more affordable, says Michael Bovee, debt management expert, and co-founder of Resolve.
Pros And Cons Of A Debt Consolidation Mortgage
Heres a side-by-side recap of the benefits and drawbacks of a debt consolidation mortgage to help you decide if its the right choice for your finances.
| Pros | |
| You can pay off high-interest-rate credit cards
Your credit scores may improve with less revolving debt You can apply the savings to your principal to pay down the higher balance faster Youll have more room in your budget to avoid using credit accounts in the future You can use the savings to build up your emergency fund |
Your monthly mortgage payment will be higher
Youll pay more in mortgage interest over the life of the loan You wont be able to deduct mortgage interest tied to your debt payoff You could lose your home to foreclosure if you cant afford the new mortgage payments Youll typically pay a higher interest rate Youll usually pay between 2% and 6% of your loan amount toward closing costs |
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How Do I Refinance My Mortgage And Consolidate Debt
In most cases, as long as you have established at least 20% equity in your home and have successfully made payments on time for the last six months, you may be eligible to apply for a cash-out refinance loan. Your home can gain equity in two ways. One, with changes in the real estate market, home values can appreciate over time, which would increase your equity. Two, as you make monthly payments towards your mortgage, you pay towards your principal balance. As the principal balance on your mortgage decreases, your equity increases.
You may be wondering, How does a refinance for debt consolidation work? Unlike a second mortgage or a personal loan, a cash-out refinance does not add an additional bill to your monthly expenses. Instead, a cash-out refinance will replace your current mortgage. Your new loan amount will be greater than what you currently owe. After closing, youll receive the access as liquid assets you can use to pay off other debt. Your monthly mortgage payment would then be helping you pay down both your high-interest unsecured debt and your home loan.
Can I Remortgage To Consolidate Debts More Than Once
You can, but I wouldnt recommend it. Technically, we have done it twice for clients. Ive never done it three times. A lot of brokers will say no because it doesnt feel right to them.
You can consolidate any type of debt into a remortgage secured loans, for example, or loans or credit cards, or even energy debt. Affordability is very important. Can you afford a bigger mortgage balance? If so, and theres enough equity in the property, you can do it.
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Debt Consolidation Mortgage: Should You Get One
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.
A debt consolidation mortgage is worth considering to pay off maxed-out credit cards, high-payment car loans or a large debt amount compared to your paycheck. But before you decide on this loan type, its important to review the pros and cons of taking out a larger mortgage to clear out other debt.
What Term Should I Look For
The term of your loan should match the lifetime of what you are buying. So for example, if you are using your mortgage to pay for short-term spending, such as changing your car, you should make sure that you repay the car loan part of the mortgage over a shorter term. A typical car loan is repaid over three to five years, whereas the mortgage term could be 20 years. If you pay for the car over 20 years, it will cost you far more in interest and youll be paying for it long after you have gotten rid of the car.
Some lenders offer flexible repayment arrangements so that the personal loan portion of the new consolidated loan can be paid off within the original term, but at the lower rate of interest.
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Comparing A Heloc With Debt Consolidation Mortgages
A home equity loan, or HELOC, is comparable to a mortgage in most respects. It’s registered against the title of your property and is secured by its equity, just like any other mortgage. The primary distinction is that it’s a revolving line of credit.
Instead of receiving a set amount of money, home equity loans allow you to withdraw cash as needed. You may also pay it down as quickly as you like.
For example, you might use your HELOC to pay off your other debts and consolidate them into the line of credit. However, instead of making lower payments as you would on a regular mortgage, you may make larger monthly payments and pay off the debt faster. Most loans have early repayment penalties therefore, it isn’t always an option in those instances.
Using A Home Equity Loan To Consolidate Your Debt
Many Americans have a revolving amount of debt from non-mortgage related expenses. In May 2019 alone, there was more than $1 trillion of credit debt, according to the Federal Reserve.
If you divide that by the most recently available population estimates for 2020 according to the Census Bureau and other sources, that works out to about $3,218 per American. Fortunately, many people can use their home equity to manage their debt.
The first step to using your home as part of a solution to this problem is understanding what home equity is. Home equity is the difference between what your home is worth and what you owe to the lender.
Home equity loans are second mortgages that allow you to tap into your equity so you can get access to cash. You can also use the cash loan to pay off other higher-interest debts such as credit card debt and possibly student loan debt. Mortgage interest rates are often lower than those of credit card debt.
For example, you might take out a home equity loan with a 4% interest rate to pay off the debt on your 18% interest rate credit card and end up paying less in interest over the long term.
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Can You Refinance Your Mortgage To Consolidate Debt
The short answer is, yes. You can refinance your mortgage to consolidate debt. If you are a current homeowner seeking options to consolidate debt, you may not realize that taking out a personal loan is not your only option. In fact, as long as you have established enough equity in your home, you can refinance to consolidate debt.
How Does Debt Consolidation Work
The benefits can be big when you refinance your home to pay off debt. Debt consolidation mortgages work best when the amount of equity you have in your home allows you to pay for a large percentage or the entire balance of high-interest debt.
With on-time mortgage payments made each month, hopefully your credit rating qualifies you to refinance your home. Work with a mortgage broker to apply for financing after youre committed to the idea.
Keep in mind that youll need to pay closing costs when refinancing. Youll want to be sure that youve got left over equity or savings enough to cover those closing fees, and they can be substantial.
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Debt Consolidation Mortgage Cons
Paying off high-interest credit cards with a low-rate mortgage refinance might sound like a no-brainer. But there are some very real pitfalls to watch out for.
Debt consolidation strategies have a high failure rate. And say that many who use home equity to pay off credit cards will then run their cards up again until theyre in even worse shape than when they began.
Remember: Unlike unsecured credit card or personal loan debt, mortgage debt is secured , cautions Ailion.
That means youre pledging your equity as collateral for the money you borrow. If you happen to default and declare bankruptcy, debts that were previously dischargeable are now secured by your equity, he explains.
Is It A Wise Decision
Practically, like other financial decisions, you might face up and downs on this decision too. But everything mostly depends on your financial situation. You might have to balance the potential benefits with the risks to get the best out of this option.
With the potential benefits discussed above, you may have to consider several disadvantages of consolidation debts into a mortgage. You must do plenty of research before remortgaging your existing home.
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Speak To A Remortgage Expert
Maximise your chance of approval with a dedicated debt consolidation specialist
Ask Us A Question
We know everyone’s circumstances are different, that’s why we work with mortgage brokers who are experts in all different mortgage subjects.Ask us a question and we’ll get the best expert to help.
- Provide proof of the debt you plan to consolidate
- Have a new property evaluation however, often this is free with a remortgage
Depending on the terms of your existing mortgage, you may have to pay an early repayment charge to get out of the agreement, as well as arrangement fees for the remortgage, although fee-free remortgage deals are sometimes available.
The name can be misleading here, as a second charge mortgage, also known as a second mortgage, is simply a loan thats secured against your home. Because your mortgage is already secured against the property, thats the first charge against the property. Therefore, if you use the same property as loan security, this will be the second charge against it.
This option can be useful for those who may not qualify for a remortgage or further borrowing due to bad credit, as second charge loans are based more heavily on the value of your equity, rather than the more traditional affordability or eligibility factors used to approve a mortgage.
Depending on who your first charge mortgage is with, you may require their permission to secure a second charge mortgage against the same property.
Will Debt Consolidation Affect My Credit Rating
In the short term there may be a dip in your credit score as your lender conducts the necessary searches prior to approving your new loan. However, the long term prospects should be much more positive as you have everything under one payment as long as you keep to your repayments schedule.
Ask a quick question
We can help!We know everyone’s circumstances are different, that’s why we work with mortgage brokers who are experts in Debt Consolidation MortgagesAsk us a question and we’ll get the best expert to help.
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The Financial Conduct Authority does not regulate some forms of buy to let mortgage.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
*OMA Mortgage Approval Guarantee is subject to you providing satisfactory documentation. See T& Cs.
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Example Of Consolidating Debt Into Mortgage
Imagine that you have a car loan with an 8 percent interest rate, a credit card loan with a 15 percent interest rate, and a mortgage loan with a 3 percent interest rate. Now, imagine that every one of those loans had a 3 percent interest rate, and that you could pay them all off with just one payment a month. Paying them off would surely be easier.
How can you make this happen? Consider your mortgage itself. Lets say your home was recently appraised at $450,000, and you still owe $250,000. You can determine your home equity by subtracting what you owe from your homes value in this case, that would be $200,000.
To consolidate debt, you would use your equity to pay off your existing loans, and increase what you owe towards your mortgage. In this example, the mortgages interest rate is much lower than the other loans, meaning that paying off the entire debt would be much easier with consolidation than without it.
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