Consolidate Debt

You can get a mortgage on your home to consolidate debt. If you have student loan debts, high credit card debt, or an auto loan you want to pay off, using a mortgage to do so can be a good idea because mortgage rates are generally lower than rates for other loans. There are two ways to do this. Take out a home equity loan of credit (HELOC) or refinance your mortgage.

Home Equity Loan

Based on the current value of your home, the lender will determine a credit limit, much like your credit card limit, and you can borrow, repay, repeat, just like any revolving credit. A HELOC does not have a set rate or set length of time for repayment.

Refinance

To consolidate debt with a refinance, you will need to do a cash-out refinance. You will then use the cash to pay off the other debt. There are many benefits to this approach,

• Combine your monthly payments into a single rate and extend the time to repay all debts.
• Get a better rate if possible.
• Switch the type of mortgage you have entirely, from FHA to conventional for example, or from an adjustable-rate mortgage to a fixed rate-mortgage.

Your monthly mortgage payment will likely increase since you are borrowing more money, but it depends on your choices. The rates for cash-out refinancing are a little higher than rates for a refinance with no cash offer, but mortgage rates are lower than rates for other loans, so it can be a great way to consolidate debt.

Loan-to-Value

The lender will let you know how much money you can access by calculating your loan-to-value ratio or LTV. This is the difference between your mortgage amount and the appraised value of your home calculated as a percentage. If you owe $125,000 on a home that is currently worth $250,000, your LTV is 50 percent. In a cash-out refinance, you can take up to 80 percent of the home value minus the amount of money needed to pay off the old mortgage. Remember, you are getting a new mortgage with any refinance.

In the above example, you could borrow up to $75,000 in equity. In a cash-out refinance the money is paid to you at closing.

Make Application

Applying for a cash-out refinance involves the same steps as applying for your initial mortgage EXCEPT the need to make a down payment. The lender will review

1. Your income, including your work history.
2. Your credit scores.
3. Your monthly debt-to-income ratio (including credit cards, car loans, student loans, child support), and,
4. Your total house payment which includes principal, interest, taxes, and insurance. If required, your total house payment would also include monthly mortgage insurance (PMI). More on your total house payment will follow.