Before anything else, you need to know whether your equity can cover your debts, plus costs, and still leave a cushion.
The lending limit
Lenders cap total borrowing at a share of your home’s value. Federally regulated banks, for example, limit a refinance to 80% of the home’s value. Other lenders set their own limits, often lower for rural or unusual properties.
A worked example
Using round numbers only to show the math:
- Home value: $450,000
- 80% of value: $360,000 maximum total borrowing
- Current mortgage: $290,000
- Room available: about $70,000, before costs
If your debts total $45,000 and costs are a few thousand dollars, consolidation fits. If they total $90,000, a refinance alone won’t cover everything.
Costs come out of the room
Legal fees, appraisal, any lender fee and any prepayment penalty reduce what’s left for debts. See the costs of consolidating.
The appraisal sets the value
The lender uses an independent appraisal, not your property tax assessment or an online estimate.
Income has to fit too
Equity is only half the picture. You also need to qualify for the new, larger mortgage payment, and federally regulated lenders apply the stress test to refinances. The good news: debts you’re paying off at closing usually stop counting against you, so consolidating can improve your debt ratios even as the mortgage grows.
Second mortgages and other lenders
A second-mortgage lender looks at combined borrowing, your first mortgage plus the new loan, against the home’s value. Limits vary, and some alternative and private lenders go somewhat higher than 80%, at a higher cost. Rural properties, acreages and condos in buildings with problems may get lower limits.
Estimate it yourself
Take a conservative estimate of your home’s value, multiply by 0.8, then subtract your mortgage balance and any secured line of credit. What’s left, minus a few thousand dollars for costs, is a rough idea of the room available at a bank.
Leave a cushion
Using every dollar of equity leaves nothing in reserve if values fall or an emergency hits. Where you can, consolidate the debts that cost the most and keep some equity untouched.
If there isn’t enough equity
- Consolidate only the highest-interest debts. See which debts to consolidate.
- Consider a second mortgage from a lender with different limits.
- Look at alternatives. See consolidation vs counselling vs a proposal.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.