Are you overwhelmed by your debt or struggling to make all your monthly payments? If so, you may be considering a debt consolidation mortgage. This type of mortgage allows you to combine all your debts into one monthly payment. It can be a great way to eliminate your debt and simplify your life. However, it’s essential to weigh the pros and cons before deciding whether this is the right option for you. Keep reading for more information about debt consolidation mortgages.
In this Article:
What is a debt consolidation mortgage?
When most people think about mortgages, they think about home buying. However, another everyday use for a mortgage is to consolidate debt. A debt consolidation mortgage is a mortgage used to pay off other debts. Paying off debt can be a practical option for people struggling to keep up with their payments because it allows them to make one payment each month instead of several.
Below are a few things to consider before deciding if a debt consolidation mortgage is right for you. One is how much your monthly payment would be and how much you are saving per month. You also need to make sure you can afford the mortgage even after you have paid off your other debts.
If you are considering a debt consolidation mortgage, it’s essential to work with a qualified lender who can help you find the best option for your needs.
How does a debt consolidation mortgage work?
A debt consolidation mortgage works similarly to a cash-out refinance and may be called a debt consolidation refinance. You borrow more than your current mortgage balance, and the difference is used to pay off your debts, which are paid through the closing.
A home appraisal is required to verify you have enough equity. Most loan programs allow you to borrow up to 80% of your home’s value.
Example of how a debt consolidation loan works
Below is an example of how much you’d save with a debt consolidation mortgage.
Let’s say you have $50,000 worth of credit card and car loan debt. And the total monthly payments for these debts are $1,200 per month.
Your current mortgage balance is $200,000, and your monthly payment is $1,354.83.
The new mortgage balance would be $300,000 ($250,000 present mortgage + $50,000 debt). Your new monthly payment would be $2,010.46. This would result in a monthly savings of $543.84 ($1,200 debt payment + $1,354.83 present mortgage – $2,010.46 new mortgage payment).
Types of debt consolidation mortgages
Conventional cash-out refinance
Conventional cash-out refinance loans allow you to borrow up to 80% of your home’s value with a credit score above 620 and solid employment history. The lender will verify income, but borrowers don’t need mortgage insurance because they will have 20% equity.
FHA cash-out refinance
An FHA mortgage is an excellent option for people with low credit scores, as they may be able to qualify if their score reaches 620 or higher. This type of loan has some drawbacks, however; You’ll also need two types of insurance, including 1) upfront mortgage insurance premium of 1.75% (which can be financed into the loan) and 2) monthly mortgage insurance premium, which ranges between .80 – .85%
VA cash-out refinance
The U.S Department of Veterans Affairs (VA) guarantees a VA loan with a cash-out loan of up to 90% of the appraised value. However, this mortgage is exclusively for military borrowers who meet specific qualifications, including income verification and a home appraisal. However, these loans have no mortgage insurance requirement, and the VA funding fee is between 2.3% and 3.6%. The VA funding fee increases with subsequent use.
Home equity loans
A home equity loan allows you to take out a second mortgage for the amount you’re eligible to borrow without paying off your current mortgage. You’ll receive the funds in a lump sum and typically have a fixed-rate payment and term between five and 15 years.
Home equity lines of credit
Home equity lines of credit (HELOCs) work similarly to a credit card at first, allowing you to borrow money when needed. Payments are usually interest-only during the draw period but must be repaid on an installment schedule once the draw period ends.
Pros and cons of a debt consolidation mortgage
Here’s a side-by-side recap of the benefits and drawbacks of a debt consolidation mortgage to help you decide if it’s the right choice for your finances.
- You can use your equity to pay off high-interest-rate credit card debt.
- Your credit scores will improve by reducing your credit card utilization rate.
- Use your monthly savings and apply them to your principal to accelerate your payoff period.
- With the additional monthly savings, you’ll be less likely to use credit cards in the future.
- You can use the savings to build up reserves.
- Your monthly mortgage payment will increase. However, your overall monthly payment will be less.
- You’ll pay more over the life of the loan in mortgage interest.
- You may increase your loan term if, for example, you have 26 years left and take out a 30-year loan.
- You can’t deduct mortgage interest that’s tied to your debt payoff.
- In addition, you will have to pay closing costs unless you get a no-closing costs loan.
Alternatives to debt consolidation mortgages
Other alternatives are worth considering if you’re worried about consolidating debt and securing it through your home. You can look into a personal loan or credit counseling company.
Do you need a debt consolidation mortgage?
Metropolitan Mortgage has been in business since 1997, and we have assisted more than 10,000 families in financing their homes in the Midwest. If you are looking for a direct lender in Overland Park and the greater Kansas City metropolitan area, we can help. Metropolitan Mortgage offers mortgage refinance programs in the states of Kansas and Missouri.