Can You Consolidate Debt Into A Home Loan?

Reading Time: 3 minutes

The pandemic put many people in a difficult situation. Job loss, fewer hours, or less business-led to lower-income, making it harder to get by. Many people resorted to credit cards during that time, but now wonder how they’ll get out of it.

Whether your credit card debt is due to the pandemic or you accumulated it beforehand, there are ways to get out and one way is consolidating it into your home loan.

If you have equity in your home, you earned it and can use it to get yourself out of high-interest debt. Does it make sense to consolidate debt into a home loan?

Let’s look at how it works.

What Is Home Equity?

First, to consolidate debt into a home loan, you need equity. This is the difference between your home’s value and your current loans. Let’s say your home is worth $300,000 and you have a $100,000 outstanding mortgage – your equity is $200,000.

If you have equity, you can use it to refinance and take out a larger loan, using the proceeds to pay your high-interest debt off. 

Is Consolidating Debt Into A Mortgage A Good Idea?

Just because you have equity doesn’t mean it’s a good idea to consolidate debt into your mortgage. First, ask yourself a few questions:

  • Can you qualify for a mortgage with an attractive interest rate? If not, it may not make sense to consolidate. If you can’t save money on interest, leaving the debt as is makes more sense.
  • What are the closing costs? Each refinance has closing costs, which may take away from the savings you’d earn. Look at the big picture – the loan’s total cost versus what you’d save paying off the credit cards to make sure it makes sense.
  • Are you able to make the payments? Remember, if you tie up the consumer debt into your mortgage, it becomes secured debt. If you don’t make your mortgage payments on time, you could lose your home. Is this a risk you’re willing to take?

The Benefits Of Consolidating Debt Into A Home Loan

You have a lot to consider, but there are many benefits of consolidating debt into a home loan including:

  • You’ll likely save money on interest – Consumer debt interest rates are high, some as high as 35.99%. Mortgage rates are at all-time lows, so consolidating your debt may save you a significant amount of money.
  • You have one monthly payment – Dealing with multiple payments increases the risk of missing one and paying late fees. With one monthly payment, it’s easier to keep track of your expenses and budget accordingly.
  • You may increase your credit score – When you pay off consumer debt, you decrease your credit utilization ratio, which increases your credit score. With little to no debt outstanding (except your mortgage), you put yourself in a good position.

What Are Your Intentions With The Home?

How you’ll use the home determines if consolidating debt into it makes sense. If it’s your primary residence, you don’t have a lot to think about beyond the interest rate and closing costs.

If it’s an investment property, though, what are your plans?

  • If you’ll keep the property and rent it out, look at the profits. Will there still be monthly cash flow with the higher monthly payments? Does the rent cover the mortgage payment and then some?
  • If you’ll fix and flip the property, will there still be room in the home’s value to make a profit? Using the equity to get rid of consumer debt is great, but if it eliminates your profits, it may not be a good investment.

You can consolidate your debt into your home loan and sometimes it’s a great idea. Like any home financing decision, weigh the pros and cons. Look at your options and determine which one will save you the most money. Figure out how much interest you’ll pay consolidating the debt and not consolidating it and make your decision that way to make the most out of your home’s equity.