Debt Consolidation Mortgage
There are all kinds of offers available that will allow you to consolidate your credit card and other debt into a mortgage. This means that with debt consolidation mortgage your interest payments will be dramatically reduced. However, it's not without its pitfalls, and there are some restrictions.
How Much Will You Be Able to Borrow?
During the housing boom, lenders often allowed homeowners to borrow as much as 110% of their home's total value. Now, most lenders will require you to retain at least 15% of equity, and possibly as much as 20%, after you cash out.
How Much Will You Save?
That depends on the term of your mortgage, and how much other debt you have. As an example, though, if you owe $20,000 on your credit cards at 16% interest, and you have a $200,000 mortgage over 30 years at 4.5%, that means that over the life of the loans, you're going to be paying almost $191,000 in interest payments. It also means that your monthly payments are going to be around $1,480. If you consolidate into a new 30-year mortgage at 4.5%, you'll save a little over $360 per month, and just over $9,642 in total interest. If you can consolidate into a 15-year mortgage, your monthly payments will be higher, but over the term of the debt consolidation loan, you'll save nearly $100,000 in interest.
Is A Consolidation Mortgage a Good Idea?
That depends - are you planning on running up your credit cards again? Sometimes, people end up in debt through no real fault of their own - perhaps they've incurred significant medical expenses, or had to make extensive home repairs. People who usually act responsibly when it comes to credit are good candidates for a consolidation mortgage. However, if you're the type of person who sees available credit as money that has to be spent, then you'd be wise to consider credit counseling before you think about a debt consolidation mortgage. It can help you to identify the reasons why your credit card debt got out of control, and can also help you to devise a better way of budgeting the funds that are available to you.
What are the Requirements?
The requirements for debt consolidation mortgage aren't all that different from what's needed for a regular mortgage. Your credit score and the amount you want to borrow will be a factor. If you're asking for the maximum amount (generally 85% of your home's value), you'll likely need a credit score of 700 or better. If you're looking for under 80% of your home's value, then your credit score will only need to be as good as what your lender would require if you were seeking a mortgage to buy a home.
In addition, if your debt-to-income ratio doesn't meet your lender's requirements (meaning that your monthly expenses are overly high when compared with your income), you may have difficulty getting approved. If you can pay off and close out your credit cards as of the time of closing, however, your lender may agree to exclude your credit card debt from the debt-to-income calculation. Don't be surprised, however, if the lender is reluctant to do so - after all, closing out your existing credit cards doesn't mean that you won't go right out and apply for new ones.
Consolidate My First and Second Mortgages
Should you think about refinancing in order to combine your first and second mortgages? Maybe.
You can refinance mortgage in such a way that the rates on our first and second mortgages are consolidated. This is known as a rate and term finance if your first and second mortgages were taken out at the same time - for instance, if you were buying two homes at the same time. However, if you took out the first mortgage and the second at different times, then this is considered cash out refinance.
Potato, potahto. The terminology doesn't really mean much one way or the other - the rules are essentially the same in either case.
Things You Need to Know
When you're consolidating, the process isn't all that complicated. But there are a few things you'll want to know. Here's the short list:
- When you apply for a refinance mortgage loan with your current lender, closing costs are usually waived along with other fees - this is because they want to keep your business. IT means that refinancing is cheaper than if you went with another lender.
- Your lender will want to see your pay stubs and bank statements, your tax returns, your W-2 statements, and possibly other documentation.
- On a refinance mortgage, you should get a copy of the GFE (Good Faith Estimate) and the closing costs, along with the interest rate and the length of the refinance mortgage.
- Your lender will process your application after the disclosures are reviewed. Your credit history will be checked before the mortgage is processed.
- You'll have to sign any applicable paperwork before your mortgage is approved. At the time of closing, your old mortgage will be paid off, and any remaining debt will be transferred over to your new mortgage. This means that your debt consolidation mortgage is complete, and you are now paying on only one mortgage.
The Final Word
A consolidation mortgage can be a very effective way of reducing your monthly payments as well as your interest rate, and it can save you a great deal of money over the long term. It is, however, only practical if you don't fall back into debt.