About Debt Consolidation Mortgage

If you are a homeowner with a significant amount of equity in your home and a growing amount of debt, you may have a distinct advantage over non-homeowners. If you have sufficient equity in your home, you may be eligible for a debt consolidation mortgage through your current mortgage holder or a different lender. A debt consolidation mortgage can reduce your stress levels and high interest charges by combining all your debt payments into one monthly mortgage payment.

Debt Consolidation

If you have built up substantial equity in your home and plan to stay for another 10 to 15 years, a debt consolidation mortgage may be the ideal solution for your debt woes. If you currently have five or more monthly credit card bills and school or car loans, consolidating may be an effective financial move. It could be worth the peace of mind and the savings in interest charges to leverage the money you have already invested in your home.

Home Equity Loan

A home equity loan (HEL) and home equity line of credit (HELOC) each utilize the equity in your home to allow you to obtain a secured (with collateral) loan. The equity in your home is calculated by subtracting all mortgages and other loans attached to the property from the home's current market value to arrive at the available amount of equity. For example, if you have a balance of $180,000 on your first mortgage, and the current market value for your home is $275,000, you have $95,000 of equity available. Typically, most lenders will allow you to borrow up to 80 percent of your property's equity, so you could potentially borrow up to $76,000, and the interest would be less than you would be paying on a credit card.

Second Mortgage

Another option for debt consolidation is a second mortgage, which is also secured by the equity in your home. Second mortgages are available as fixed-rate loans or adjustable-rate mortgages (ARMs) and typically the maximum loan for a second mortgage is 80 percent of the original cost for your property. Two advantages of a second mortgage include a lower interest rate that could reduce monthly debt payments significantly, and chances are you will be able to deduct the interest -- on balances of $100,000 or less -- for tax savings as well.

Cash-Out Refinance

A cash-out refinance is definitely worth considering when you can get a new fixed-rate loan with an interest rate of one or more percentage points below your current rate. If you have a home valued at $250,000, with $100,000 remaining on an original mortgage of $150,000, you could refinance your home with a new $175,000 loan and take the remaining $25,000 as cash to pay your debts. Refinancing, however, means paying all the fees and closing costs associated with any new mortgage and starting a new term of, say, 30 years when you may only have had 15 or 20 left on your mortgage. So, ideally, you'll want to refinance with a shorter term, if possible, for substantial savings over the life of the loan.