It’s hard to move forward in life when you have a serious debt problem, particularly with credit cards. However, if you own a home, you might be able to leverage it to get out of your situation. You can use your home’s equity to combine your obligations into a debt consolidation mortgage, home equity loan, or line of credit.
Read on to see how to consolidate your debt into a mortgage.
Debt Consolidation Mortgage
If you refinance your current mortgage into a consolidation loan, your debts get rolled into a single monthly payment. This strategy may suit you if you have high-interest debt on which you’re basically paying the interest.
Refinancing can garner you as much as 80% of your home’s appraised value, less the outstanding balance. Note that the interest rate on this kind of mortgage may vary from your current mortgage, and that if you modify your mortgage, your original agreement terms will change.
With debt consolidation mortgages you get a structured payment plan – with payments due weekly, biweekly, semi-monthly, or monthly — and a specific pay-off date. Keep in mind though, you will incur fees for appraisals, title insurance, legal fees, and title search. Depending on your mortgage choice, you also may have to pay a prepayment charge.
In sum, the advantages of a debt consolidation mortgage include the ability to borrow from a new mortgage, lower interest rates, and lower monthly payments.
Home Equity Loan
What is “equity,” you might ask? Well, it’s the difference between your home’s value and your mortgage balance. The equity you have increases as you pay down your mortgage, and the property’s value rises.
Your home equity can be used to procure a line of credit or loan, which combines your credit card and other debts into a single payment. For a loan, your home is used as security. What’s cool is that interest rates on equity lines of credit are lower than other loans. Your higher credit limit helps with high-interest loans.
A home equity line of credit gets you as much as 65% of your home’s appraised value. The equity you have in your home aligns with the amount of cash you can borrow.
You should determine your home equity and how much you can borrow. A home equity calculator can help with that. You can use this debt consolidation calculator to learn how much you could save through loan consolidation.
Usually, you only fork over interest on the funds you use, as opposed to your overall credit limit. Because interest rates vary, your payments could increase. Your fees will be like those of a debt consolidation mortgage.
Benefits of a debt consolidation home equity loan or line of credit include a lower interest rate and monthly payments, flexible repayment options, no prepayment charge, you only pay interest on used funds, you can pay off debt quicker, you may have tax deductions, and you get reusable credit.
How Do I Qualify for a Debt Consolidation Mortgage or Home Equity Loan or Line of Credit?
The main factors for qualification include your credit history, financial stability, home equity, and proof of income. The kinds of loans you can consolidate include credit card loans, auto loans, personal lines of credit, and student loans.
Now that you know how to consolidate your debt into a mortgage, your unmanageable obligations – especially for high-interest credit cards — can become more manageable. Before you take this approach however, it’s important to understand defaulting on this will mean forfeiting your home. Be certain you can comfortably make the payments before signing that loan agreement.