Using Home Loans for Debt Consolidation: Yes or No

By Karen Lawson
Mortgage Credit Problems Columnist

You've got a comfortable amount of home equity, and an uncomfortable level of credit card debt. Converting home equity to cash for consolidating consumer debt may be a good move, or not. How or if refinancing your mortgage or taking out a home equity loan for debt consolidation can work depends on your situation.

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Mortgages and Debt Consolidation: APR, LTV, and Finding Debt Relief

In order to determine whether or not you should borrow against your home, you'll need to know:

  • Your home's current value: Local real estate professionals can provide an estimate of current home value, but if you take out a home equity loan or mortgage refinance, your mortgage lender will require an appraisal.
  • Your primary mortgage loan balance: Divide your current mortgage balance by your home's value to determine its loan-to-value ratio (LTV). Conventional lenders typically won't refinance above 80% LTV, but you may qualify for an FHA refinance.
  • Your total consumer debt: Add up the balances of your credit card accounts and other debt you want to consolidate. Make note of the APR for each account. If you can get a home loan at a lower APR than you're paying on credit card debts, it may make sense to use home equity for debt consolidation.

Please consider the following before making a final decision to use a home loan for debt consolidation:

  • Refinancing, home equity loans, and home equity lines of credit can cause foreclosure. All of these options require putting your home up as collateral; if you fail to make payments, your lender can foreclose. If you have little home equity or are concerned about your finances, consulting a consumer credit counselor may help you find options that don't involve using your home as collateral.
  • Compare the annual percentage rates (APR) for your credit card balances and new home loan or home equity loan. The APR is displayed on monthly credit card statements and mortgage quotes; it is the amount of all finance charges related to a specific loan or line of credit calculated as an annual percentage of the account balance.
  • How long will youl keep your home? Borrowing against your home may not be appropriate if you're planning to move within a couple of years, as you may not break even on closing costs for refinancing and lender fees for home equity loans.

Mortgage Calculators Can Help

Using mortgage calculators can help with estimating affordability, comparing refinancing options, and evaluating mortgage quotes.



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