If you own a home with equity and have a lot of debt, you might wonder if you should roll your debt into your mortgage.

It might be possible, but is it smart? 

The key is to understand the big picture and how rolling unsecured debt into a secured loan will affect you.

What is a Debt Consolidation Mortgage?

When you roll unsecured debt or consumer debt into your mortgage, it’s a debt consolidation mortgage. This means you took some of your home’s equity and used it to pay off your debt.

Here’s what it might look like.

You own a home that’s worth $300,000. Your current mortgage is $150,000. This means you have $150,000 in equity. If you sold the home today, you’d get $150,000 minus legal fees and other fees from the sale (seller costs).

If you use some of your equity to pay off consumer debt, you increase your mortgage amount and have a higher mortgage payment. Typically though, the interest rate will be lower on the mortgage than it would on the consumer debt.

Don’t forget, you must also consider any fees you’ll incur for breaking the current mortgage agreement.

How Does a Debt Consolidation Mortgage Work?

To consolidate debt into your mortgage, you must renew your mortgage and/or break your current mortgage agreement. Before you do, make sure you’re aware of the costs of doing so. 

Your new mortgage amount will be for the amount of your existing mortgage plus any consumer debt you’ll roll into it and any fees you incur for breaking your current mortgage agreement.

Like when you bought your home, you must prove you can afford the loan by meeting the loan guidelines. Each lender has different requirements, so make sure you understand the following:

• Minimum credit score required
• Maximum debt ratio allowed
• Amount of equity necessary
• Any necessary reserves or assets on hand

If approved, your new lender will pay off your current mortgage and any debts you included in the loan. Always make sure you follow up with each debt and make sure it was completely satisfied. Sometimes there is leftover interest or fees you must cover to fully pay off the debt.

What are the Pros and Cons of a Mortgage Debt Consolidation Loan?

Consolidating your debt into a mortgage has its pros and cons. While it might seem ideal if you have equity and can save money, there are downsides you should consider too.

Pros

• You have just one monthly payment

If you are in over your head in debt, it can feel like you’re drowning. You don’t know which payment to make each month and sometimes you might even forget a payment. With a debt consolidation loan, you have one payment to worry about each month.

As long as you make your mortgage payment on time, you don’t have to worry about excessive interest charges or dealing with multiple payments.

• The interest rate may be lower

Mortgage loans typically have much lower interest rates than consumer debt, which may help you get ahead faster. If your consumer debt has an interest rate of 29% and your mortgage has a rate of 4%, you’ll pay more principal toward the debt than interest and get out of debt faster.

• Your credit score may increase

If you’ve had trouble keeping up with your debts, having them consolidated into one payment may help your payment history. When you pay your debts on time, your credit score will benefit. It may also increase if you lower your credit utilization rate by paying off your debts and not racking up more debt.

Cons

• The debt takes longer to pay off

When you roll debt into your mortgage, you roll into a loan with a much longer term. The average mortgage has a 30-year term, which means you’ll pay for the debt for the next 30 years. This also means you’ll pay more interest since you’ll have a balance for much longer.

• You put your home at risk

Consolidating unsecured debt into your mortgage is risky because if you can’t make the payments, your home is at risk. If you miss 3 or more mortgage payments, the lender can start the foreclosure process, which means you could lose your home. 

If you missed credit card payments, you’d pay consequences financially, but you wouldn’t put your home at risk.

• It’s easy to rack up more debt

If you aren’t careful, you could rack up more debt again. If you leave your credit cards open and don’t lock them up, you might suddenly charge more than you can afford to pay off, putting yourself back into debt. 

Should you Consolidate your Debt into your Mortgage?

Whether you should consolidate your debt into your mortgage depends on the situation. Ask yourself the following questions:

• Do you have enough equity in your home to roll the debts into it?
• Can you be responsible enough not to rack up more credit card or personal debt?
• Are you capable of making the required mortgage payment so you don’t put your home at risk?
• Do you qualify for a lower interest rate?

Final Thoughts

A debt consolidation mortgage can help you get your debts under control, but it has its downsides too. If you’re looking for a permanent fix and won’t rack up any more debt, using your home equity can be a great way to get out of debt.

It may not work for everyone, though. If you find yourself constantly in debt or you don’t have enough equity to pay your consumer debt, contact EmpireOne. Our credit counsellors can help you determine which steps would work best for you to help you get control of your debt and improve your credit score too. 

Dealing with debt can be overwhelming, but our professionals are there for you every step of the way with many opportunities including debt consolidation, consumer proposals, or even bankruptcy as a final option.