Mortgages for Debt Consolidation: taking your 1st step to clear your debt. - Everything Mortgage (2024)

FAQs

Is consolidating debt into mortgage a good idea? ›

Rolling all of your debts into a mortgage then makes it possible to merge your financial obligations into a single monthly payment at a lower interest rate, thereby reducing your overall monthly out-of-pocket expenses. This improves your cash flow and may even make it possible for you to more aggressively save money.

Updated September 5, 2019 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

While you could borrow on your mortgage to consolidate your debts, you may wish to consider the other options available to you such as: speaking to your existing lender to change your existing borrowing agreement. taking a personal loan to consolidate your debts.

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.

Your debt consolidation loan could come with more interest than you currently pay on your debts. This can happen for several reasons, including your current credit score. If it's on the lower end, lenders see you as a higher risk for default. You'll likely pay more for credit and be able to borrow less.

Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.

That relief has expired and been extended several times. The latest extension, enacted in December 2020, provides relief for debt forgiven from January 1, 2021 through December 31, 2025.

Only when the lender is convinced you will be unable to pay it back will it concede to forgiveness provisions. One way this happens is through a loan modification program — that is, you negotiate new terms for your original loan. You might get a lower payment in exchange for a lengthier payout period.

In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.

Lenders like to see a credit score of at least 670 for a debt consolidation loan, but probably closer to 700 just to be safe. It's not the only factor that matters, but a low credit score could stop you from getting a debt consolidation loan with reasonable interest rates and terms.

What score do you need to consolidate debt? ›

Generally, borrowers with scores of 740 or higher will receive the best interest rates, followed by those in the 739 to 670 range. If your credit score is lower than 670, debt consolidation may not be a good option for you.

In general, it's best to pay off credit card debt first, then loan debt, since credit cards often have the highest interest rates. When you prioritize paying off credit card debt, you'll not only save money on interest, but you'll potentially improve your credit too.

Borrowers with scores as low as 500 may qualify for a debt consolidation FHA loan, a mortgage backed by the Federal Housing Administration (FHA). Like the conventional cash-out refinance, an FHA cash-out refinance caps you at borrowing 80% of your home's value and requires proof of income and a home appraisal.

Different lenders will have different cut-off points for their debt to income ratio, but many draw the line at 50%. Also, while a higher debt to income ratio might not stop you from getting a mortgage completely, it may mean that you can't borrow as much.

Success with a consolidation strategy requires the following: Your monthly debt payments (including your rent or mortgage) don't exceed 50% of your monthly gross income.

Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.

Cons. You'll lose at least some of your home equity. A cash-out refinance will generally reduce or eliminate the home equity you've built over time. Keep in mind that home equity is a highly valuable asset that strengthens your financial security.

However, credit cards and personal loans are considered two separate types of debt when assessing your credit mix, which accounts for 10% of your FICO credit score. So if you consolidate multiple credit card debts into one new personal loan, your credit utilization ratio and credit score could improve.