A debt consolidation mortgage uses your home’s equity to pay off higher-interest debts, like credit cards, car loans and lines of credit, so you’re left with one payment, usually at a much lower interest rate.
How it works
- You borrow against your home’s equity, through a refinance, a second mortgage or a home equity line of credit. See which way to consolidate.
- The lawyer pays your other debts directly at closing.
- You make one payment on the mortgage instead of several.
Why it can help
- Lower interest: mortgage rates are usually far below credit card rates.
- One payment that’s easier to manage
- A fixed end date, if you choose a set term and amortization
- Possible credit improvement as card balances drop. See debt consolidation and your credit score.
Why it can backfire
- Unsecured debt becomes secured by your home
- A longer repayment period can mean more total interest. See why a lower payment can still cost more.
- Freed-up cards can fill up again. See what to do with your paid-off cards.
A simple example
Round numbers, for illustration only: you owe $18,000 on two credit cards at about 20%, $12,000 on a car loan at 9% and $8,000 on an unsecured line of credit at 11%. Together the minimum payments might be around $1,200 a month. Rolling all $38,000 into a mortgage at a much lower rate could cut that substantially, and the interest saving is real if you keep paying the debt down quickly. See how to calculate your real savings.
What lenders look at
- Your equity, meaning how much room there is between what you owe and the lender’s limit. See how much equity you need.
- Your income, to confirm you can afford the new mortgage payment
- Your credit history, which affects which lenders and rates are available
- The debts themselves, which the lawyer pays directly so the lender knows they’re gone
What it costs
Expect legal fees and an appraisal, possibly a prepayment penalty on your current mortgage, and lender fees with some lenders. See the costs of consolidating.
Is it right for you?
It tends to work when you have enough equity, steady income, and the debt came from a one-time event or high interest rather than ongoing overspending. See is consolidating a good idea?
Quick answers
See the debt consolidation mortgage FAQ.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.