Smart Borrower Center
Tools to help you borrow better
A: It may indeed be possible for you to consolidate your debt by rolling it into your mortgage. This strategy can often save you a considerable amount in interest payments. Since credit cards and certain other consumer loans often carry high interest rates, combining these debts with your mortgage can reduce the overall amount you pay.
It’s not a magic formula, however, and much depends on how much equity you currently have in your home. The good news is that if you bought your home a number of years ago, chances are your home equity has grown along with the real-estate market.
For example, if you bought a $200,000 house five years ago with a mortgage of $175,000, your home equity at the time you purchased it was $25,000. In a stable market, sixty monthly payments would increase it by about $10,000 (based on a 30-year term at 7 percent). But if during that time the value of your home also increased by 15 percent -- a conservative figure for many states -- this appreciation would have netted you an additional $30,000 in equity. And using some of that equity to pay off outstanding debts could be a wise move.
You can do it by refinancing to a new mortgage with a higher principal, a practice known as cash-out refinancing. Using the example above, your mortgage principal would be about $165,000 after five years. You could therefore refinance to a new loan with a principal of $185,000 and use the additional $20,000 to pay off your credit cards. The interest rate of the new mortgage is likely to be much lower than that of your credit cards, and the forced repayment schedule might be easier to manage.
Another alternative is to apply for a home equity loan or line of credit. Sometimes called second mortgages, these allow you to tap into your equity without refinancing. They too have rates much lower than credit cards, and their flexible terms can help you pay your debt faster and with less expense.
If you do not currently own a home and are looking to use your first mortgage as a means of consolidating debt, you will have more difficulty since you have no home equity to tap. If you have saved funds to use as a down payment, it may make more sense to use that to pay down your debts before shopping for a mortgage. Reducing your debt load will improve your credit score, and that will allow you to get a lower rate on your mortgage. Talk to a financial adviser to see which strategy best fits your needs.
Dan Moore
Vice President, Product Management