Can You Consolidate Debt Into a Mortgage?
Updated December 2, 2019 . AmFam Team
If you’ve been looking at your bills lately and wondering how to save on those monthly payments, you may be thinking, “Can I consolidate this debt into a new mortgage?” If high interest rates on credit card debt are preventing you from paying off your balance, you might benefit from refinancing with a home equity line of credit.
You can consolidate debt in a mortgage re-fi and point the home equity cash towards credit card debt. But like everything else, there are pros and cons to doing so. Take a look at our advice on what you need to know on refinancing your home to pay off 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 you’re committed to the idea.
Keep in mind that you’ll need to pay closing costs when refinancing. You’ll want to be sure that you’ve got left over equity or savings enough to cover those closing fees, and they can be substantial.
Is It a Good Idea to Consolidate Debt Into a Mortgage?
Building up a case to refinance your mortgage for debt consolidation purposes can depend on a number of key factors. The amount of equity you’ve got in your home can dictate the total amount of debt you’ll be able to pay off. With the right market conditions, and enough equity to knock out a sizable portion of your high-interest credit card debt, you can benefit when you refinance your mortgage to pay off debt. Here are a few other good reasons to consider a re-fi:
- You could be paying off your credit card debt at a lower interest rate
- Your new monthly payment will likely be less than your current credit card payment
- You may be able to raise your credit score more quickly
- You may get a better rate on your new mortgage
- You may be able to switch to a better mortgage type
When Is Refinancing Your Mortgage Not a Good Idea?
As attractive as refinancing your mortgage may seem, it’s not the right answer for everyone. Here are a few reasons why refinancing may not be the right move:
- Your home can become collateral on the debt
- Closing costs on the refinancing can be costly
- The length of time that you’ll be paying the loan off may increase
- The amount you’re financing could require you to pay private mortgage insurance (PMI)
Alternative Options to Paying Off Your Debt
If it’s looking like a refinance to pay off your debt is out of the question, don’t worry — you still have plenty of options. From home equity lines of credit to zero APR balance transfers, there are ways to chip away at your debt quickly and efficiently.
Home equity line of credit (HELOC)
A HELOC can be a great alternative to a debt consolidation and mortgage refinance. By comparison, HELOCs don’t require you to completely rebuild your entire mortgage. Your HELOC acts as a second mortgage and lets you borrow against your home equity’s line of credit without expensive closing fees usually associated with closing on a home.
If you were hoping to pay off $10,000 in credit card debt, and your home equity was valued at $120,000 on a $360,000 loan, a HELOC could be a good idea. That’s because the cost of the loan wouldn’t jeopardize your PMI and you’d be paying lower interest than you are currently.
Debt consolidation loan
Debt consolidation loans work to reduce interest payments and streamline monthly payments to a single source. By combining smaller, high-interest debts, you can apply for a low interest loan that takes a bite out of your interest payments. You may have to put your home up for collateral if your credit rating isn’t great, but a zero APR payment for a long string of months can really help you move quickly toward your financial goals.
Balance-transfer credit cards
Another alternative to home mortgage debt consolidation lies in the transferring of balances between credit cards. This tactic offers a clear advantage — when zero APR is available. Credit card banks will sometimes offer a limited time opportunity where the cost to transfer balances from other credit cards is free or marginal. You can shuttle debt between cards for a small fee and then leverage a period of months with no APR.
Your Next Steps for Debt Consolidation
It’s key to remember that even though your credit card debt may feel overwhelming, there are options available to help reduce that monthly burden. Because everyone’s debt is a little different, you’ll need to put together an accurate monthly budget to know how much cash is coming in and going out. Here are other steps you should consider when consolidating debt:
- Research all your financial options thoroughly before taking any action
- Review your monthly cash flow and trim away at unnecessary spending
- Inquire with mortgage lenders about current refinancing rates
- Build a realistic plan that gets you out of debt in a less expensive way
With a little homework, and a lot of determination, you may be able to reduce your monthly payments and still tackle credit card debt.
Maintaining good financial health doesn’t have to be difficult. That’s why we’ve put together our financial advice section on money matters. While you’re considering your lending options, remember to reach out to your American Family Insurance agent (Opens in a new tab) and review your homeowners policy. You’ll find real peace of mind with a carefully crafted policy that meets your insurance needs and your budget.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
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Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
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Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
