How to Pay Off Credit Card Debt With Your Mortgage?

Do you have credit card debt and find it challenging to manage it? Understandably, when the interest rates are high, it can be challenging to reduce the balance. A solution that works in such cases is to refinance credit card debt into a mortgage. 

How does it work? Your debts on credit cards are consolidated into a single manageable payment and are primarily available at a lower interest rate. That's because home loans mostly have lower interest rates when compared to credit card interest rates. Cash-out refinances help pay off your debts on credit cards with a consolidated home loan and cashing in on your home's equity. The cashed out is the refinanced amount/ mortgage.

How do you refinance credit card debt into a mortgage? Follow this guide as we take you through the steps to do so.

Rolling a Credit Card Debt Into a Mortgage

The underlying concept of home loan debt consolidation is that it helps tap into the home's equity. What is home equity? It is the difference between the existing value of your home (as per market price) and the balance remaining on your current mortgage. You can utilize home equity in the following ways. 

• By Cash-Out Refinance 

In this case, your present mortgage is refinanced. You get a higher amount than what you currently owe. The difference is taken in cash, which can be utilized to pay off credit card debt.

• Home Equity Loan

In this case, you take a second mortgage as a lumpsum amount against your home equity. The repayment term is fixed, and so is the interest rate.

• Home Equity Line of Credit (HELOC)

You can use your home's equity to roll credit card debt into a mortgage. You can withdraw from the mortgage as and when needed and in part, and you pay interest on the borrowed amount.

When consolidating debt with a mortgage, a part of the home loan is used to pay off the credit card debts. In most cases, the home equity you convert into cash depends on the loan terms. For example, 

• Depending on the state, you can borrow up to 100% of your home's equity with VA loans.

• FHA loans allow up to 85% of home equity.

• Cash-out refinance schemes allow homeowners to take up to 80% of the home's equity. 

Things to remember - 

• Your total debt will not be reduced when you consolidate a home loan.

• The balance on your credit card may be zero or less, but your home loan will increase. 

• The amount you roll credit card debt into the mortgage will be an add-on to your new mortgage.

How do you refinance credit card debt into a mortgage?

Step 1: Review Your Financial Situation

The first step in consolidating debt with a mortgage is assessing your financial situation. Prepare a synopsis of your total debt from credit cards, monthly payments, mortgage terms, the equity value of your home, and current interest rates. 

Step 2: Evaluate Your Home Equity

The method of calculating the home equity is to subtract your mortgage balance that is currently outstanding from the current market value of your home. You can then calculate the value you can borrow against the home equity. 

Step 3: Look At Your Options

Consider the pros & cons of different options for rolling credit card debt into a mortgage and see which one suits you. You usually have a choice between a HELOC, a Home Equity Loan, and a Cash-Out Refinance. 

Step 4: Compare the Interest Rates and Costs

For every option available, you must assess the interest rates and costs associated with each option. The interest rates of credit card payments are higher than the mortgage rates on home loans. Besides that, you should consider other fees like closing costs, penalties, and fees associated with each option.

Step 5: Apply for the Loan 

After finalizing the right option, you should apply for the loan. You need to prepare documents supporting and showcasing your income, employment, and home value. Remember, the lender will also conduct a thorough check of your credit history and score and appraise your home.

Step 6: Time to Roll a Credit Card Debt Into a Mortgage

Once approved, use the funds from the consolidated debt mortgage to clear the outstanding debt on your credit cards. 

Step 7: Create a Repayment Plan

Once the debt has been repaid, you need to focus on creating a plan to repay the home loan debt consolidation. You need to ensure that your budgeting is practically done to avoid further debt.

Pros and Cons of Home Loan Debt Consolidation 

Pros

• Home equity loan interest rates are generally less than the interest rates on credit cards. Thus, you can gain by reducing your monthly payouts. 

• Consolidation home loan helps simplify your finances. Thus, the risks of missing payments can be greatly reduced.

• You may benefit from tax benefits as, in many cases, the interest on home loans is tax-deductible.

Cons

• Since the consolidation home loan is against the equity of the home, if you fail to pay the mortgage, it can lead to foreclosure, increasing the risks of your home.

• In the case of home loan debt consolidation, there are closing costs and fees that can work out more expensive payouts through the life of the loan.

• The term of the loan gets extended, which means more financial burden for a longer time.

Is it True that Home Equity Loans have Lower Interest Rates?

When you choose to consolidate debt with a home loan, you should research well to understand if the home equity loans truly have lower interest rates. 

According to stats, the average credit card interest rate is higher than 20%. The penalty rates are also higher for defaulters and late payers. If you compare, the fixed mortgage rates of an average 30-year loan are about 6% to 7% (as of 2023). 

When you consider consolidating debt with a home loan, you must discipline your spending habits because you have put your home equity on the line, and you cannot afford to get into another credit card debt. You must also take into account the long-term financial impact, including your retirement planning. It is always best to take professional advice to completely understand what you are getting into.