Using a mortgage loan refinance for debt consolidation

When you are working towards a debt-free life, it makes sense to use every asset at your disposal to achieve your financial goals. For homeowners, that may mean refinancing your debt with a debt consolidation mortgage loan or another home equity product. We’ll do a deep dive on your options as a homeowner looking to pay off your debt. 

What is a debt consolidation mortgage loan & how does it work? 

Let’s kick things off by explaining how debt consolidation mortgages work. To understand debt consolidation mortgages, you first need to understand debt consolidation. 

What is a debt consolidation loan? 

A debt consolidation loan is any type of loan that is being used to bundle and pay off other debts. Most commonly, loans that are marketed as debt consolidation loans are personal loans – which are then used to pay off smaller obligations, such as credit card balances. 

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Debt consolidation can be an effective debt management tool - it can allow you to finance multiple higher-interest loans into one simple, lower-interest monthly payment. 

What is a mortgage loan refinance? 

The next financial tool you need to understand is a mortgage refinance – more specifically, a cash-out refinance. When you refinance your mortgage, you replace your existing home loan with a new loan with a new rate and a fresh set of terms and conditions. 

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With a cash-out refinance, that loan amount is larger than your existing mortgage balance, enabling you to pocket the difference and take advantage of the equity in your home. 

How does mortgage loan refinance debt consolidation work? 

There is no specific cash-out refinance product targeted for debt consolidation. Mortgage loan refinance debt consolidation simply refers to taking the proceeds of your cash-out refinance and applying them to the financial goal of eliminating your existing debt. 

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This wraps all your monthly obligations into one convenient payment, often at a much lower interest rate.

Pros and cons of mortgage loan refinance debt consolidation

A debt consolidation mortgage loan is not the right fit for every situation. Here are a few pros and cons to help guide your decision. 

Pros of refinancing to pay off debt

• Large check size:  Unsecured debt consolidations are unlikely to cover the cost of major debts like medical bills, student loans, and personal loans. A cash-out refinance can cover more of your debt. 
• Convenient monthly payments: When you wrap all your debts into your mortgage, you have fewer monthly payments to keep track of. Because the majority of mortgages come with a fixed interest rate, your monthly payments are also extremely predictable. 
• Competitive rates: A loan that is backed by an asset will almost always have a lower rate than an unsecured loan, providing you with a more affordable rate. 

Cons of refinancing to pay off debt

• Expensive closing costs: When you refinance your mortgage, you have to pay closing costs on the total value of the loan, including the original mortgage balance. 
• Risk of losing your home: Your newly refinanced loan may come with a larger monthly mortgage payment. If you have trouble making payments, more than just your credit score will be at risk. 
• Long-term financing cost: While the interest rate for a cash-out refinance is lower than many other types of loans, a mortgage can be paid out for up to 30 years. The longer it takes to repay a loan, the more interest you ultimately pay. Additionally, refinancing can result in a higher rate depending on when you took out your current mortgage. 

Types of debt consolidation mortgage loans

While a conventional cash-out refinance is the most common choice for mortgage loan refinance debt consolidation, a few other financial tools can also fit into this category. 

Cash-out refinance

A cash-out refinance involves replacing your existing mortgage with a new, larger loan. The process will be familiar to anyone who has bought a home, including a home appraisal to verify the value of the property.   

Requirements

Credit score: 620 or higher

Income/DTI: A steady, documented income and a DTI of 43% or less 

LTV: Generally up to 80%, although some lenders will go higher.  

FHA cash-out refinance

If your home is your primary residence, you may be able to refinance into a loan backed by the FHA (Federal Housing Authority). FHA loans allow for a broader credit range than a traditional mortgage, but they are restricted to your primary home. 

Requirements

Credit score: 580 or higher

Income/DTI: No specific income, but a DTI (debt-to-income ratio) of under 42%

LTV: Up to 80% for a refinance 

Other: You need to have lived in your home for at least a year. You may also need to pay a mortgage insurance premium (MIP). 

VA cash-out refinance

A VA loan is a special type of mortgage for eligible veterans, overseen by the VA. VA loans can come with a range of terms and generally have competitive interest rates. 

Requirements

Credit score: Generally 620 or higher

Income/DTI: No specific income, but a DTI (debt-to-income ratio) of under 41%

LTV: Up to 90% for a refinance, although select lenders may allow you to borrow up to 100% of your home equity.  

Other: You need to be an eligible veteran or a surviving spouse to qualify. For a refinance, you’ll also need to be living in your home. 

Home equity loan

Instead of refinancing your primary mortgage, you could consider taking a second mortgage to pay down debt. A home equity loan generally comes with a fixed rate for an easy and predictable monthly payment. You’ll pay less in closing costs than you would with a refinance, but the rates may be slightly higher. 

Requirements

Credit score: 680 or higher

Income/DTI: Steady income and a DTI of under 43%

LTV: Generally up to 80%

HELOC

Similarly to a home equity loan, a home equity line of credit (HELOC) lets you borrow money against your home equity without replacing your primary mortgage. In the case of a HELOC, you receive this money via revolving line of credit instead of a lump sum. 

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A HELOC has two phases, draw and repayment. During the draw period, you can borrow money up to your predetermined limit, taking out more funds as you pay down your balance. During the repayment phase, you can no longer withdraw money from the line of credit. Instead, you pay down what you previously took out. 

Requirements

Credit score: 680 or higher

Income/DTI: Steady income and a DTI of under 43%

LTV: Generally up to 80%

Home Equity Investment

A Home Equity Investment is a form of equity financing for homeowners. Instead of making a monthly payment towards the principal, homeowners share a percentage of their home’s future value at any time during the 30-year term. 

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Home Equity Investments are easier to qualify for than traditional financial tools. Many HEI companies don’t even look at income. 

Requirements 

Credit score: 500 or higher

Income/DTI: No income or DTI requirements 

LTV: Generally up to 70% 

Other: Eligible location 

Is it a good idea to consolidate debt with a mortgage loan?

Whether consolidating your debt with a mortgage is a good idea or not depends on a few individual factors, including your current mortgage rate, your ability to qualify for competitive terms, and your ability to make a larger monthly mortgage payment. 

Can you consolidate debt onto your mortgage?

You can use your home equity to consolidate your debt through a cash-out refinance, or by taking out a different home equity product, such as a HELOC or a Home Equity Investment. 

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Final thoughts

If you are a homeowner with debt, your home equity can be a powerful tool to help get your finances back on track. Whether you use a cash-out refinance or a different home equity product, you may be eligible for more favorable terms and easier qualification than what is available via unsecured loans. 

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If you are interested in paying down your debt with no monthly payments, no income requirements, and no need for perfect credit, consider a Home Equity Investment from Point. 

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