What Is A Home Equity Loan
A home equity loan allows you to take advantage of a competitive housing market and borrow at lower rates without having to move or sell your home. It works by giving you borrowing power that’s tied to your home’s value.
The amount you’re allowed to borrow will be determined, in part, by your home’s equity, which is the gap between what you owe against your home and what your home is worth today.2
Since the loan is secured against the home, your lender will likely view the loan as less risky and offer you an interest rate that’s well below the cost of a personal loan or credit card.
Get Free Professional Advice
There’s free help available to help you get back on track.
Financial counsellors can help you make a plan and negotiate with your mortgage or credit providers.
Free legal advice is available at community legal centres and Legal Aid offices across Australia. If you’re facing legal action, contact them straight away.
How Closing Costs Figure Into Your Decision
Closing costs are another factor to consider before you refinance to pay off debt. Lenders and service providers charge hundreds or thousands of dollars in fees when you refinance a mortgage. That’s money that you could otherwise use to pay down debt. Compare the closing costs with the overall interest savings on the consolidated debt. You want the interest savings to exceed the closing costs.
In other words, it may make sense to spend $3,000 on mortgage closing costs to save $12,000 in interest, but not to save $2,000 in interest.
» MORE: Closing costs calculator
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Protect Your Home Or Other Assets
To get a lower interest rate, you might be considering turning your unsecured debts into a single secured debt. For a secured debt, you put up an asset as security.
This means that if you can’t pay off the new loan, the home or car that you put up as security may be at risk. The lender can sell it to get back the money you borrowed.
Consider all your other options before using your home or other assets as security.
Things To Consider When Consolidating Debt
Consolidating debt with a home loan increase may be attractive because it could reduce your debt repayments, as your home loan is likely to be at a lower rate than say a personal loan or credit card. However, its important to consider the overall picture and the total costs, including any fees and repayments over the life of the loan.
To make sure its the right option for you, there are several things to think about.
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Cashing Out Equity To Pay Off Debt
Can you use a cash-out refinance to pay off debt? You bet! In fact, a 2021 survey found that debt consolidation is the second most common reason for a cash-out refinance.
Now could be an especially good time to cash-out home equity and pay off debts. Equity levels rose by nearly 30% between 2020 and 2021. And mortgage rates are still low.
Qualified homeowners could substantially lower their debt payments and increase their monthly cash flow using this method.
In this article
Know Your Credit Score
Lenders have tightened their standards for loan approvals in recent years. Some consumers may be surprised that even with very good credit, they will not always qualify for the lowest interest rates. Typically, lenders want to see a of 760 or higher to qualify for the lowest mortgage interest rates. Borrowers with lower scores may still obtain a new loan, but they may pay higher interest rates or fees.
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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.
Why You Can Trust Bankrate
At Bankrate, we have a mission to demystify the credit cards industry regardless or where you are in your journey and make it one you can navigate with confidence. Our team is full of a diverse range of experts from credit card pros to data analysts and, most importantly, people who shop for credit cards just like you. With this combination of expertise and perspectives, we keep close tabs on the credit card industry year-round to:
- Meet you wherever you are in your credit card journey to guide your information search and help you understand your options.
- Consistently provide up-to-date, reliable market information so you\’re well-equipped to make confident decisions.
- Reduce industry jargon so you get the clearest form of information possible, so you can make the right decision for you.
At Bankrate, we focus on the points consumers care about most: rewards, welcome offers and bonuses, APR, and overall customer experience. Any issuers discussed on our site are vetted based on the value they provide to consumers at each of these levels. At each step of the way, we fact-check ourselves to prioritize accuracy so we can continue to be here for your every next.
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Advantages Of Adding Your Credit Card Debt To Your Home Loan
Here are some of the advantages of adding your credit card debt to your home loan:
You Will Have Fewer Monthly Bills
Adding your credit card debt to your mortgage takes care of two bills at once as you pay for both simultaneously.
You Will Pay Lower Interest
There is a decent chance that your credit card interest may actually be lower than what you used to pay. But that is dependent upon the market and the state of your credit.
You May Be Eligible For Interest Deductions
Adding your credit card debt can help you save some money during tax time. There is the possibility that you will qualify for a mortgage interest deduction. This would allow you to claim a reduced income depending on how much interest you paid on your home loan.
How Credit Card Debt Affects Your Credit Score
As of this writing, American consumers owe more than $1 trillion in revolving credit debt, which includes credit cards. Your outstanding credit card balances and any other debt you still owe for that matter impacts your credit score.
Your is a reflection of whats on your credit report and gives mortgage lenders an idea of your creditworthiness. The higher your score, the less risky lenders perceive you.
Your FICO credit score, which is used by most lenders, is made up of five different categories:
- Payment history: 35%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Ideally, your ratio shouldnt exceed 30% on each credit card individually and collectively. A higher ratio tells mortgage lenders that youre overextending yourself and may be more likely to fall behind on loan payments.
However, dont be so quick to pay down all your cards to a zero balance or close your paid-off accounts to get a higher credit score. Your credit mix also matters, and completely ditching debt can negatively impact your score. Instead, keep low balances and pay them in full each month.
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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.
Other Ways To Consolidate Your Credit Card Debt
Not sure if credit card refinancing is right for you? Weve got you covered there, too. Many debt management and repayment strategies exist, but its essential to familiarize yourself with your options to help guide you toward the right choice for your financial future.
Weve listed a few alternative credit card consolidation methods for you to consider.
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Talk To Your Mortgage Provider
If you’re struggling to pay your mortgage, talk to your mortgage provider as soon as possible.
All lenders have programs to help you in tough times. Ask to speak to their hardship team about a hardship variation. They may be able to change your loan terms, or reduce or pause your repayments for a while.
Living Paycheck To Paycheck
Youre not alone. Canadians are carrying heavier loads of personal debt than ever before. For some of us, the cost of servicing those debts is in itself an obstacle to correcting the problem. Each month can be a chase to make the interest payments to keep the debt afloat. Sometimes, it may help to consolidate debt into your mortgage.
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Choose The Right Option For You
Increasing your home loan is an important decision, so you should consider getting independent financial advice.
If you are a Westpac customer and experiencing difficulty making your loan or credit card repayments, please call Westpac Assist on . We may be able to help in several ways:
- an extension of the loan term to reduce your repayments
- an interest rate reduction
How Does The Process Work
We start by doing an assessment of your situation. We list your current debts both the total amounts owed and the monthly payments you have to make. We then create a scenario that takes into account your potential new mortgage, with the applicable monthly payment. We also look at your homes current market value, to make sure that a new mortgage can be registered against it. With a mainstream lender, your new mortgage amount needs to be less than 80% of the homes market value with an alternative lender, we can usually go to about 85% of the market value.
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Drawbacks Of Using A Cash
The first thing to realize about using a cash-out refinance to pay off debt is that youre not really paying off the debt. You havent reduced the total amount you owe. Youve merely changed from one type of loan to another, lower-interest type of loan.
Of course, there are big benefits to this strategy . By rolling your high-interest debts into a low-interest mortgage balance, you could potentially save yourself a big chunk of money each month and create more room for savings and daily expenses.
But there are some inherent drawbacks to cash-out refinancing, too:
Some homeowners also run into trouble when they use a cash-out refinance to pay off debt and then run their debts back up again. This can put you right back where you started but without a cushion of available home equity to protect you.
Refinancing Credit Cards By Taking Out A 401k Loan
So, youre considering borrowing from your 401k to pay off credit card debt? This is a risky strategy that should be well researched.
One positive from taking out a 401k loan is that it does not affect your credit score. The other benefit is it has better interest rates than an unsecured personal loan.
But 401k loans should only be used as a last resort. The penalties and fees associated with taking out and not being able to repay the money far outweigh any benefit associated using a 401k loan to pay off credit card debt.
Taking money out of the 401k fund will reduce your retirement and set you back financially several years as you inch closer to retirement age. And if you lose your job, the balance of the 401k loan is due within 60 days of termination.
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Equity In Owned Vehicles
If you have a vehicle that is paid off or has a low balance in comparison to what it is worth, this could be an interesting route to take. Taking a loan out, using your vehicle as collateral, would allow you to get a loan to pay down your other creditors. In this situation, you gain the ability to receive an auto loan rate which is typically much lower than an unsecured personal loan.
The downside here would be a limitation of the loan being capped at the value of the vehicle. Also, when carrying an auto loan, most lenders require full auto insurance coverage on the vehicle, which could increase the monthly expenses if normally carrying PLPD. That said, this is a great way to leverage an asset to obtain a lower loan rate.
Unsecured Debt = Bad Debt
The difference between credit card debt or unsecured debt, versus a mortgage, can mean thousands of dollars. As you may know, the interest you pay on a credit card or unsecured credit line is typically much higher than on your mortgage. Because of this, using your home equity to pay off your high-interest credit card debt can save you money in the long run.
That said, deciding whether it makes sense to refinance your mortgage will depend on your individual situation. Either way, with the right plan in place, you can be well on your way to a strong new financial life. If a consolidation is the way you decide to go, every month you could be seeing the difference: a boost to your monthly cash flow, one easy payment, faster debt paydown, and potentially thousands of dollars in interest savings.
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How Refinancing Your Mortgage Can Help You Pay Off Debt
When you refinance a mortgage to pay off debt, one of the main benefits is youll pay less in interest costs. Mortgage rates are much lower than rates on other consumer products like credit cards, personal loans, and private student loans.
How you use a refinance to pay down your debt depends on whether you do a rate-and-term refinance or a cash-out refinance.
How To Refinance Your Mortgage
When you own real estate, specifically your home, you have equity in your home. Home equity is essentially the amount of money youve already paid towards your mortgage loan. Or, the difference between your homes value and the remaining amount of money left to pay off your mortgage. There are a few ways to realize equity in your home, and one of them is to refinance your mortgage. However, refinancing your mortgage isnt a decision you should take lightly.
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How To Choose The Best Credit Card Refinancing Loan
Long-term financial impact is the most important factor to consider when considering the best loan to refinance credit card debt. You dont want the solution to put you in a worse position.
Make sure you understand your financial situation how much of a monthly payment you can afford and what you hope to accomplish. Dont jump into something that may look good without researching it first. The Consumer Financial Protection Bureau and Federal Trade Commission both have tips on how to spot scams and lenders who will cost you too much money. If you have a relationship with a bank or credit union, that might be the best place to start.
Ease of applying is a great perk, but shouldnt be the top qualification. The major things to keep in mind are:
- A maximum monthly payment that can eliminate your debt.
- Fees that arent so bad they make it more expensive than its worth.
- A lower interest rate than what youre currently paying.
- Monthly payments you can afford.
Should I Refinance My Mortgage To Get Rid Of Credit Card Debt
Reading time: 3 minutes
Taking on a new mortgage to get rid of credit card debt may seem extreme, but for some consumers in certain situations, it may actually pay off. Because mortgages generally have much lower interest rates than credit cards, you could save significant money in interest. However, this repayment method also has a few considerable drawbacks. For example, you’ll have less equity in your home than you had previously.
Refinancing your mortgage to pay off credit card debt is a big decision and should only be considered if your debt reaches into the tens of thousands of dollars and is growing via interest every day. It’s generally not a good solution for an amount, such as a few hundred or a thousand dollars, that you may be able to tackle with a long-term repayment effort. Before you make a decision one way or the other, it’s important to know what you’re getting into.
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