When you are drowning in credit card debt, it can seem very enticing to consolidate all of that debt into your mortgage, giving you one payment every month and lower interest rates. For many people this is a good alternative to paying the minimums on large amounts of credit card debt. For some though, it is not the right choice or it may even be impossible due to the stricter lending requirements that are in place today. Determining if it is the right choice for you requires you to evaluate the amount of debt that you have outstanding, the amount of equity that you have in your home and what your intentions are for your credit cards in the future.
How Much Debt do you Have?
The debt that can be consolidated into a home equity or first mortgage includes credit cards, student loans, installment loans and medical debt. When you add up the total amount of outstanding debt that you own, make sure to include every bill that you have outstanding. Next you need to determine how long you think it will take you to pay off each debt. Take a close look at what you pay now, whether it is the minimum payments or you make larger payments and calculate the estimated date that the debts will be paid off. If you are only making minimum payments and you have a large amount of outstanding credit card debt, it could be a great number of years before the debt is paid off. On the other hand, if you make more than the minimum payment and make your payments on time, you might be able to get the balances paid down much faster than you would if you consolidated them into your mortgage.
How Much Equity is in your Home?
The equity in your home is equivalent to a very valuable savings account. The value of your equity should be used very sparingly because as we all have seen, values can drop fast, forcing you to lose that equity in the blink of an eye. If you have a large amount of equity, such as 50 percent or more, tapping into it to consolidate debt is not a bad decision. If you are closer to the 20 percent mark or even less, then careful thought should be given to using that equity to pay off other debts. Many banks will require at least 20 percent equity remains in the home after the debt consolidation or cash-out refinance occurs. This could prove to be rather difficult for many homeowners today.
How Will you Use your Credit Cards?
If you decide that refinancing your mortgage and taking the equity out to pay off credit cards is the right decision, you should really evaluate your intentions for your credit cards in the future. If you plan on using them right after the balances are wiped clean, it is not in your best interest to consolidate your loans. On the other hand, if you are disciplined enough to put the credit cards aside and only use them if a true emergency, such as if something with the house or your health went wrong, then consolidating your debts could make sense.
Consolidate Credit Card Debt with Care
Before you jump head first into the first offer that you receive to tap into the equity in your home, give it careful thought. Aside from the fact that you will be increasing your loan amount and increasing your monthly mortgage payment is the fact that you will be starting your mortgage term over from scratch. For some people, it will be possible to refinance from a 30-year term into a 15-year term with the cash-out thanks to today’s low rates. If the payment on a 15-year loan does not negatively affect your debt-to-income ratio, it could be a good option to get your debt consolidated. Before you decide, make sure to give careful thought to the entire scenario, determining if this is the best use of the equity that you have built up in your home.Click to See the Latest Mortgage Rates»