What homeowners should know about consolidating debt into a mortgage

Consolidating your existing debt into a new mortgage offers a number of advantages.  (Shutterstock)

Household debt has increased in recent years, reaching record highs in 2022, according to Federal Reserve data. Not only can these balances be costly, but many forms of consumer debt — like student loans — can also affect your ability to buy a home.

Even though mortgage rates have climbed throughout 2022, they’re still lower than rates for other types of debt, such as credit cards. Keep reading to find out whether or not it’s possible to consolidate your existing debt into a new mortgage, and why you might want to do so.

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  • Can homeowners consolidate debt with a new mortgage?
  • How to consolidate debt into a mortgage
  • Pros and cons of consolidating debt into your mortgage
  • Debt consolidation alternatives

Can homeowners consolidate debt with a new mortgage?

Put simply: Yes, homeowners can consolidate debt into a new mortgage loan. However, it’s important to note that this isn’t possible for all buyers and there are some key steps you’ll need to take first.

As a homeowner, you can pull from your established home equity (the amount of your home you actually own) to pay off other balances — such as credit card debt or student loans — by refinancing your original mortgage. Mortgage refinancing is a popular option if you’re:

  • Looking into debt consolidation
  • Financing a big home remodel
  • Needing to reduce your monthly mortgage payments
  • Hoping to snag a lower interest rate

The more equity you’ve built in your home over the years, the more you may be able to borrow against it with the help of a cash-out refinance loan. Home equity loans and home equity lines of credit (HELOCs) are also an option to utilize your home equity.

Building up equity in a property can take time, though, and is usually the result of increased market values, payments toward your loan’s principal, or both.

If you think refinancing is the right move for you, visit Credible to compare traditional mortgage refinance rates without affecting your credit score.

How to consolidate debt into a mortgage

Using a mortgage to consolidate your existing debt can be fairly simple, as long as the equity is there and available.

First, you’ll need to find a lender that’ll allow you to cash out your equity so that you can apply it to your existing debt. Not every lender offers cash-out refinances, especially with increased mortgage regulations in recent years and loan-to-value (LTV) limits.

As you’re searching for potential lenders, you’ll want to compare the best rates available to you. The lower the rate, the less interest you’ll pay over the life of your loan. Since mortgage rates are often lower than personal loan rates or other lines of credit, this can be a great way to save money.


Pros and cons of consolidating debt into your mortgage

Before using your home’s equity to consolidate other forms of debt, it’s important to consider all the potential advantages and disadvantages. 

Pros of consolidating debt into a mortgage

  • You can pay off high-interest debt for less. Credit card interest rates are typically in the double digits; mortgage loans, by contrast, often have single-digit interest rates. Rolling high-interest balances into a mortgage can potentially save you thousands of dollars on your debt repayment.
  • You may be able to lock in lower interest rates on your mortgage loan. If rates have dropped since you originally took out your mortgage, you may be able to lock in a better rate and save even more.
  • You can utilize your equity for other purposes. In addition to paying off your existing debt, you can use your home equity from the same cash-out refinance loan to fund other purchases, like major home improvements to further increase its value.

Cons of consolidating debt into a mortgage

  • You might not get approved to consolidate. Not all lenders offer cash-out refinance loans. Even if the lender does allow this, you’ll be limited to a certain portion of your home’s equity (typically 80% for a conventional refinance), which may not be enough to consolidate your existing debt balances.
  • You’ll eliminate much of (or all) your home equity. By immediately pulling from your equity, you’ll eliminate this potential safety net. This can create a sticky situation if you suddenly find yourself needing to sell your home or access that money for another purpose.
  • You’ll take longer to pay off your home. Since your repayment term resets when you take out a new mortgage, it’ll take you longer to pay off your property. You’ll also need time to build up more equity again.


Debt consolidation alternatives

In many cases, consolidating debt before you apply for a mortgage can work better than using your equity to pay it off. That’s because paying off your debt beforehand:

  • Unlocks access to other lenders that may not be willing to offer a debt consolidation mortgage
  • Can boost your credit score prior to underwriting a new mortgage loan
  • Increases your monthly available cash flow
  • Lowers your debt-to-income ratio, which can help you qualify for better loan terms

Before applying for a mortgage, double down on your budget and aggressively pay down your debt balances.

You can also use products such as a personal loan or 0% APR balance transfer offer to refinance and eliminate other debt.

These strategies can simplify your debt repayment, lower your interest rates and monthly payments, and get you out of debt sooner.

With Credible, you can easily compare mortgage refinance rates from multiple lenders in as little as three minutes.

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