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Debt Consolidation Mortgage: Using your home to pay off debt

Posted on: 24th Dec, 2005 01:10 am
If you're serious about paying down your debts and getting rid of high-interest payments, then it's the right time to consolidate your debts. Consolidation helps you minimize the number of payments on unpaid debts besides reducing our debt amount.

There are different options to consolidate debts but you need to choose the right way out considering the type of debt you have, be it a personal loan, home loan, multiple credit cards or a combination of home loans.

Using a personal loan to consolidate credit cards, auto loan, medical bills etc is one way of getting debt-free. But utilizing your home is at times even a better way to reduce your debt especially if it's a combination of secured and unsecured loans.

4 Ways to use your home and consolidate debts:


  • Rolling unpaid debts into home mortgage:
    If you're planning to buy a home with a mortgage, you may like to include the unpaid debts into the loan amount. The total loan shouldn't exceed 95% of your home value or else you won't even qualify for FHA loans. However, for conventional loans, you can borrow maximum up to 80-85% of your home value.

  • Pull out extra cash by refinancing:
    If there is already a mortgage on the home and enough equity too, you may go for debt consolidation refinance wherein you'll be able to pay off the existing loan and take out extra cash thereby borrowing more than the loan balance. But refinance for consolidation makes sense only if market rates are comparatively lower than what you are charged currently. This will help you save in interest payments, and consolidate debts with the extra cash and interest savings. If you take the itemized deduction, you may get tax benefits on the interest as well. But you need to be clear as to why you are refinancing and how it can help you.

  • Watch out for second mortgages:
    You can try out with second mortgages for debt consolidation if you have thousands to pay for credit card debts and medical bills etc. You can borrow at fixed rates (home equity loan) as well as adjustable rates (home equity line of credit or Heloc).

    Compared to credit card rates, second mortgages are available at reduced rates, often 10% lower than the former. So, you are likely to save in interest by going for home equity debt consolidation. However, you need to be aware that you don't run up the credit card balances right after consolidation or else you'll be in debt again!

    Moreover, if you're in default, and home prices are on a decline, you'll have problems recovering the debt by selling the home because you'll owe more than the home's worth. To avoid such a situation, consider home equity debt consolidation only if you think you can afford payments on two mortgages. Check out if second mortgage is the right option for you.

  • Reverse mortgages are an option if you're a senior:
    If you're a senior aged 62 and above, you can take out reverse mortgage against your home and consolidate your bills. But as per the eligibility criteria, you'll have to pay down the debts as soon as you get the loan proceeds. Know why reverse loans are worth considering .
The above options are available for consolidation even if you have bad credit. But this depends upon how bad your credit looks to be and whether lenders still judge you as a potential borrower.

Why go for mortgage instead of personal loan for consolidation


Here are 5 reasons why you should opt for a mortgage rather than a personal loan to consolidate debts:
  1. Comparatively lower rates: Debt consolidation mortgages are available at rates lower than those of unsecured personal loans which do not require collateral.

  2. How long to keep the loan: If it's a mortgage, the loan term can be long as we'll as short depending upon the program you apply for. But a debt consolidation personal loan usually comes with a long period, though there are short term loans with higher rates.

  3. Tax deductible Interest: If you itemize your tax deduction, you'll be able to deduct mortgage interest on your taxes (there are special conditions for home equity loan/heloc tax deduction) but this isn't possible with a personal loan.

  4. How much you can borrow: The amount of home loan offered to you depends upon your home value/equity. So, higher the value/equity, higher is the loan offered depending upon your financial standing. But for personal loan, the maximum amount depends upon your financial and credit standing as no collateral is required here.

  5. Strict lending rules: Though home loans have strict lending rules, personal loans are even stringent to qualify due to the lack of security.
Debt consolidation home loans give you the chance to eliminate debts, often faster than any other way. Moreover, you can avoid being harassed by collection agencies and creditors if it's about credit cards and unsecured loans. But don't forget when you take out a home loan, you are risking your home because if you can't pay off the loan, you may lose it. Otherwise, you'll have to find out options to save your home. Instead of taking such a lot of trouble, it's better to judge your financial and credit standing before going for a debt consolidation mortgage.


I want to take a debt consolidation mortgage. The lenders I talked to gave me offers for a home equity loan. Some advised that a cash-out refinance will do. I am really getting confused. Can you guide me with the right information?
Posted on: 24th Dec, 2005 03:03 am
Hi,

I think you should go for home equity loan provided you can carry on with your regular payments. Why I am saying this is, the cash-out refinance rate is applied on the outstanding loan balance and also the extra cash, but the interest rate on home equity loan is charged only on the additional cash required.

But let me tell you that if you stop making payments on the home equity loan, then possibly your lender can sell the home through foreclosure. This is what many people are nowadays coming across by borrowing against their home equity.

So I"ll say that if you can be regular on your payments, then take a home equity loan for debt consolidation.

Merry Christmas :D

Thanks,
Jerry
Posted on: 24th Dec, 2005 03:35 am
If a loan was made for $60,000 with property used as collateral but the property is only valued at $8,000, does that mean that the remaining $52,000 would be considered unsecured loan. If so how can I remove the lien for $52,000 back to the borrower so I can clear the title on my property? Thanks
Posted on: 15th Nov, 2008 11:43 am
Hi rasta!

Your query has been answered in the following link.
http://www.mortgagefit.com/propertytransfer/warrantydeed-title-1.html#67149

Please take a look.

Thanks,

Jerry
Posted on: 17th Nov, 2008 04:40 am
I have 25k in credit card debt and a 30 yr fixed at 5.5%. Should I use a home equity loan for payoff of debt and if so for how long?
Posted on: 08th Nov, 2009 08:37 pm
Using your mortgage or home loan to consolidate debt is a great idea, especially credit card debt as the interest on these is very high, however the penalties attached to breaking or refinancing a loan mid way through a fixed term can quickly erode those benefits.

You may be better off with a debt consolidation loan for the credit card debt instead.
Posted on: 09th Nov, 2009 03:13 pm
Really a great article. By reading this article we can know about Debt Consolidation Mortgage. This aricle helped me for collecting more information. Thanks for sharing it.

[URL Deleted as per forum rules. Thanks.]
Posted on: 26th Apr, 2011 03:08 am
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