Do you have equity in your home just sitting there? Are you also in over your head in consumer debt? You may have the answer to your debt problem right in the heart of your home – the equity. A debt consolidation mortgage loan may help you save money on interest, get a handle on multiple bills, and give you peace of mind.
What is Home Equity?
Your home’s equity is the difference between the home’s current value and what you currently owe on your mortgage.
Let’s say for example that your home is worth $300,000 and you have a first mortgage with $100,000 outstanding. Your equity is $200,000. With the right qualifications, you may be able to borrow against this equity and consolidate your debt.
Typically, you’d have to wait until you sell your home to access the equity, as it’s the difference you’d receive from the sales price and paying off your mortgage.
If you want to access the equity earlier, for something like debt consolidation, you can do so with a home equity loan, line of credit or a cash-out refinance.
Are you wondering if debt consolidation is right for you? In order to decide, you must completely understand how it works.
Your consumer debt is debts that include credit cards, personal loans, and payday loans - any loans that aren’t tied to your home or have collateral. Let’s say you have four credit cards each $5,000 balances and a 19.5% interest rate. It would take you 10 years with a payment of $370 to each card to pay the cards off in that time.
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What is Debt Consolidation?
You can probably guess that you’ll pay a lot of interest over those 10 years and who can honestly afford $370 times five cards each month? If you only make the minimum payment, you’ll be paying on those debts for a lot longer than 10 years. Instead, you can consolidate your debt, by rolling it into your mortgage. You can roll it into your first mortgage with a cash-out refinance or take out a second mortgage, such as a home equity loan or line of credit.
When you roll the debt into your mortgage, you have one payment for all of your debt. Yes, your home is now part of the debt’s collateral, but with much lower interest rates and more affordable payments, you can better control your debt and pay it off quicker.
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What are the Qualification Requirements?
Qualifying for debt consolidation loans varies by loan product. In general, you’ll need:
- At least a 680 credit score
- A housing ratio of no more than 31% (your gross monthly income versus your house payment)
- A total debt ratio of no more than 3% (your gross monthly income versus your total monthly payments)
- A good credit history (no late payments, collections, or BKs in the last 24 months)
- Adequate equity in your home
When it comes to home equity, the amount you need varies by program. In general, though, you can borrow up to 80% of your home’s value, which includes the amount of your current mortgage. For example, if your home is worth $300,000, you may be eligible to borrow up to $240,000, but first, you must deduct the amount of your outstanding mortgage.
The exact qualifications depend on the type of loan. Typically cash-out refinances (refinancing your first mortgage) require stricter qualification requirements because you’re taking out a much larger mortgage than you currently have outstanding.
Tips to Maximize the Benefits of Debt Consolidation
If you’re going to consolidate your debt, make sure you do it wisely, here are some great tips to use:
- Only take out as much equity as you need to consolidate the debt
- Make sure you can comfortably afford the new payment as it now uses your home as collateral
- Put your credit cards in a safe place where you won’t use them once you consolidate the debt
- Make extra payments toward your principal when you can to get the debt paid down faster
- Maximize your credit score and lower your debt ratio as much as possible to get the best interest rates and terms on your debt consolidation mortgage
- Check today's rates and begin the loan application process.
The Benefits of Debt Consolidation
- Mortgage loans used for debt consolidation typically have much lower interest rates than consumer debt
- You’ll likely have lower payment each month making it easier to save or even get ahead on the debt by making extra payments
- You have a ‘fixed end date,’ with a mortgage unlike credit cards that can seem never-ending
- You may be able to deduct some of the interest on your taxes (consult with your tax advisor)
- Debt consolidation may help your credit score improve by decreasing your utilization rate (the amount of debt outstanding compared to your credit lines)
The Downsides of Using Home Equity for Debt Consolidation
- Mortgages typically have long terms, if you opt for the maximum 30-year term, you are paying on the debt for another 30 years
- If you don’t have ‘great’ credit, you may not get the lowest interest rates or best terms available
- You put your home at risk if you don’t make your payments on time
- You’ll have less home equity available should you plan to sell your home soon
The Downsides of Using Home Equity for Debt Consolidation
If you’re in over your head in debt and have equity in your home, put it to good use. With today’s low rates and attractive terms, it’s easier than ever to consolidate your debt. Rolling your debt into your mortgage is an affordable way to eliminate the debt, take control of your finances, and use your home’s equity for a greater purpose.
If you’re ready to explore your options for debt consolidation using your home equity, contact us today! We’d be happy to get you started on the path to financial freedom!