Consolidating debt with your mortgage tvdating org
You may be tempted to consolidate your credit card and other high-interest debt into a mortgage with much lower payments. Lenders now require the homeowner to keep at least 15 percent to 20 percent equity after cashing out. Today’s debt consolidation mortgages are more conservative than those seen during the housing boom, when lenders allowed homeowners to refinance and cash out as much as 110 percent of the value of their homes.“Depending on the circumstances, (use equity) for big-ticket items such as tuition, a sudden illness that devastates the budget, sometimes even the purchase of an automobile when you have thought things through and you have compared that financing cost to what might be available,” he says.“But don’t run out and use it for credit cards for vacations, for frivolous things because it is not an unlimited source, as we saw when the market turned.” The main concern with using equity to pay off credit cards is that often, it is a temporary solution to a much bigger problem.“The real issue behind the credit card debt is that they may need to create a better spending plan for the family,” Harper says.“And if you haven’t addressed that deficit or the reason that credit card debt continues to grow, then you are going to find yourself right back in that situation again and there may be no equity at that point.” The requirements to get a debt consolidation mortgage, or cash-out refinance, are not much different from those to get a standard mortgage — except for the minimum equity requirement, says Bill Banfield, a vice president for Quicken Loans.
You typically do this by taking out a new personal loan to repay your other existing debts, and then paying this new loan back over a set term.
With a personal loan you’ll have just one repayment to make every week, fortnight or month over a set term – you can usually choose your own frequency of repayments.
And if the interest rate on the personal loan is lower than your credit card rates – and they often can be – this can help you get ahead in reducing your overall debt.
But in some cases, it’s possible to qualify for a debt consolidation mortgage by excluding the credit card debt from the DTI, as long as the homeowner agrees to pay off and close the accounts at closing, says Matt Hackett, operations manager for Equity Now.
Depending on the amount of credit you have available, closing credit card accounts can affect your credit score, Hackett explains.
That’s why the responsibility of not falling into the debt trap a second time lies in the hands of the homeowner.