Loan Type Select One Purchase Home Equity Refinance Debt Consolidation FHA/VA State Select a State Alabama Alaska Arizona Arkansas California Colorado Connecticut D.C. Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Credit Rating Select One Excellent Good Fair Poor View Privacy Policy

Debt Consolidation Intertwined with Household Mortgages Staff - Mortgage Lenders Plus.com

There are several ways that debt consolidation can be intertwined with household mortgages. The primary reason that people take out home equity loans and home equity lines of credit (HELOCs) are for the purpose of debt consolidation. Calculating the savings in these transactions is not, however, as simple as one might think.

For example, take the borrower who chooses to roll credit card debt into a new mortgage. Our hypothetical borrower makes a thirty thousand dollar down payment on a three hundred thousand dollar house with a mortgage of 6%. He chooses to roll $15,000 in credit card debt into the loan, and borrows $285,000, paying off his credit card debt that was at 12% interest. On the surface, it looks like a good deal, because the credit card debt interest is cut in half and moreover, becomes tax deductible.

Hopefully, the interest rate on the household loan remains the same. That’s because the calculator says that a mere 1/4 percent increase on a $285,000 debt will offset the 6% savings on the credit card debt, including the deductibility. Increasing the mortgage will also alter the loan-to-value ratio which in turn will lead to a longer obligation to maintain mortgage insurance on the home.

So unless your down payment is a healthy one, consolidating debt with a new first mortgage isn’t always a good idea. Consolidating debt with a second mortgage, or home equity loan, may prove to be profitable. Home equity loans aren’t going to deliver the low interest rates of a primary mortgage, however; one of the issues of how valuable debt consolidation is when it’s done with a five or ten year second mortgage depends upon your tax bracket.

Debt consolidation using a home loan is going to lower the monthly payments that include mortgage plus credit card bills. It does not necessarily lower your indebtedness or the total amount you will pay on the debt. In many cases, you are simply extending the period of debt payment by taking out a long term loan and lowering the payments that way. That may be OK for some people, particularly with unmanageable short term debt. But don’t confuse the lower payment with a lower loan balance.

Debt consolidation should not dictate the mortgage shopping process, if you are considering using a first mortgage for that purpose. Retiring a short term debt in the thousands should not decide the interest rate for a loan in the hundreds of thousands. For home equity borrowers, it is important to include loan origination costs in your calculations; if you are contemplating using a HELOC it is critical to calculate the tax impact over a period of years in order to get an accurate fix on your savings.