In the U.S., personal debt is at an all-time high. According to the Federal Reserve, household debt hit a record $16.9 trillion at the end of 2022, which is up $2.75 trillion since 2019. If your consumer debt feels overwhelming and your monthly payments are a large portion of your income, you may look for other solutions.
One way to reduce your personal debt is to use your mortgage to help reduce your financial burden. While this strategy won’t work for every situation, it’s a smart avenue to explore. Here are some ways your mortgage could help you pay off your debt.
Benefits of Using Your Mortgage to Pay Off Debt
Mortgage interest rates are typically lower than credit card interest rates, so consolidating this debt into your home loan could save you money. While there are downsides, such as losing some equity in your home, eliminating credit card debt can be your first step to more financial freedom.
Improve your credit score
Your credit score will usually improve once you eliminate or drastically reduce your credit card debt. This improved score can provide numerous benefits, such as peace of mind, better rates on insurance, lower interest rates, higher credit limits, and more housing options. A good credit score can also improve how you appear to employers if a new job requires a background check.
Fewer monthly payments
When you have multiple monthly payments to keep track of, it can be easy to miss a payment, which will accrue more interest. Consolidating your debts means you have fewer monthly payments and less risk of overlooking a payment. Rolling your personal debt into a home equity loan allows you to pay your monthly debt at once.
Save on interest
Credit card interest rates can feel crippling. If you’re tired of paying thousands of dollars every year on credit card interest, consolidating your debts can help you save on the amount of money you’re paying in interest.
Having a lower interest rate means more of your monthly payment will go to the principal of your debt. Using your low-interest home loan to pay your high-interest credit card debt can help you to save more money long-term.
How to Use Your Mortgage to Pay Off Debt
Here are a few of the most common ways your mortgage can help pay off your debt.
Mortgage refinance
When you refinance your mortgage, the process is similar to applying for a mortgage. Consider these essential factors before you refinance your home and use the mortgage to pay your debts.
- Having enough equity in your home, as this equity is essentially paying the debt. There needs to be enough equity in the house to borrow against while also maintaining equity in the home.
- A good credit score
- Funds to cover the closing costs, such as the application fee, appraisal fee, and any other fee your lender requires
- Proof of income
Cash-out refinance
A cash-out refinance will work if you take equity from your home in exchange for cash. In exchange for the cash, you will receive a higher loan amount to replace your previous loan. After you’ve cashed out, your mortgage payments will be on the higher loan. A cash-out refinance process is similar to the process of applying for a mortgage loan. The lender will underwrite the loan, appraise the property, and you’ll complete the required paperwork.
Other Ways to Use Equity to Pay Off Debt
In addition to refinancing, there are other ways you can leverage your mortgage to pay off your debt. Below are some more ways your equity in your home can help you pay off personal debt.
Home equity line of credit
One option is a home equity line of credit (HELOC). A HELOC lets you access your equity for debt consolidation without refinancing. A HELOC is a line of credit where you borrow against your home. This line of credit is similar to a credit card. If you’re trying to consolidate your debt, a HELOC has a lower interest rate than credit cards. A HELOC’s interest rate follow mortgage rates. So, while you will still need to pay the principal of your consolidated loan and debt, it will be at a lower interest rate.
Second mortgage
A second mortgage differs from refinancing, as a second mortgage means adding a new mortgage in addition to the original mortgage. Taking out a second mortgage can consolidate your monthly payments if you have multiple high-interest debts.
A second mortgage also has a lower interest rate than credit cards. It’s important to understand that if you default on your mortgage, the lender can take over your property. Taking out a second mortgage is a significant action, and the pros and cons should be considered carefully.
How Keller Home Loans Can Help
At Keller Home Loans we care deeply about your home financing and ownership goals and are committed to helping homebuyers achieve home ownership dreams. We know you have unique financial needs in today’s ever-changing real estate market. As a full-service mortgage lender, we have the solution for nearly every mortgage need. From renovation loans to financing for manufactured housing, and everything in between, our goal is to make homeownership more accessible. Let’s work together to find the right mortgage product for your next home-buying experience.
We can offer:
- A fast approval process
- Exceptional customer service
- Competitive rates and terms
Making the decision to pay off your debt with your mortgage is a significant one.
The first step should be speaking with your financial advisor and reaching out to your trusted mortgage professional, such as Keller Home Loans. Begin your home search or path to financial security by getting pre-approved for a home loan. Applying now will help start your homeownership journey. Contact us today to learn more.
