Can Credit Card Debt Be Rolled Into Your Mortgage? – A Simple Guide
Credit card debt haunts thousands of people per year and most are looking for a way to get rid of it as fast as possible. A way to do this is to roll your credit card debt into your mortgage. This way out of debt is becoming more popular. The big question is can you do this and how can you do it?
Adding your credit card debt to your mortgage payment isn’t usually an option. But leveraging your mortgage and either refinancing it or using a home equity line of credit (HELOC) is. Both options should be used as a last resort but they are possible ways to use your mortgage to pay off your credit card debt.
Most people’s largest asset is their home. The time and money they have invested in that home have taken years to accumulate. They have built equity in that home thus allowing them to leverage it to become credit card debt-free once and for all.
Before we get into this, I’m not suggesting you run to the bank today and eliminate your credit card debt this way. There are other, less risky options that you should start with first. But for the sake of education, I want to give you all the information.
Cash-out refinancing means that you take the equity out of your home and restart your mortgage at a lower amount.
For example, if you bought a $150,000 home and still have $100,000 left to pay on the mortgage, you have $50,000 in equity. To do a cash-out refinance, you would go to your mortgage provider or another bank and tell them exactly what you want to do.
They would then allow you to refinance for the $100,000 left instead of the $150,000 that you originally bought the home for. This would give you $50,000 to use towards your credit card debt.
It’s important to note most banks will want you to keep some equity in the home to lower their exposure to risk. In most cases, you would cash-out refinance for $120,000 and have $30,000 in cash.
Cash-out refinancing isn’t perfect though. If you are close to paying off your mortgage (less than 25% left) then you should take extra time to calculate the dollars and cents. Going through this process costs money and restarting a mortgage at 15, 20, or even 30 years means you will be paying a large sum in interest.
This example was overly simplified and there is much more that goes into the process which you should discuss with your banker. Here are some pros and cons of cash out-refinancing to pay down credit card debt.
- Your debt payments will be consolidated into one payment.
- If you can itemize on your taxes then the increase in interest payment will be tax deductible.
- You’ll save money by paying a lower interest rate (mortgages have lower interest rates than credit cards).
- You’ll have no more credit card debt!
- Cash-out refinancing to pay down credit card debt doesn’t solve the root issue of not being able to control your spending.
- Refinancing costs money (the bank has to make money). Usually, you will pay anywhere from 2-5% of the mortgage amount.
- The bank will also take fees. Appraisal, inspection, filing, accounting, and other fees add up fast.
- If you have less than 25% remaining on your mortgage then you may actually be spending more money than you’re saving.
Home Equity Line Of Credit (HELOC)
Over the last 10 years, home equity lines of credit have become extremely popular. It has only been recently that banks have been restricting who can get them and for how much. HELOC’s are popular to use for home improvement projects like a new deck or refinishing a bathroom but they can also be used for paying down credit card debt.
Home equity lines of credit are different from cash-out refinancing because you are taking out a loan against your home’s equity instead of using it alltogether.
This may seem pointless because you still have a debt payment but the interest rate and payment are usually much more favorable than that of a credit card.
A word of caution, a HELOC is a loan against your home and a credit card isn’t. This means if you default on your HELOC payment, the bank could seize your assets. In simple terms, they could take your home. This wouldn’t happen with simple credit card debt.
Even with that risk, this doesn’t mean using a HELOC couldn’t be helpful in paying off your credit card debt.
- Home equity line of credit’s interest rate is usually considerably lower than that of a credit card (4-7% vs. 18-25%)
- HELOC’s have longer payment duration. This means lower monthly payments overall.
- If you are in good standing with your bank then you may not need a great credit score to qualify.
- You will be credit card debt-free!
- You need to qualify for your bank in the first place and in most cases need to have a large amount of equity in your home.
- There are still fees that must be paid to the bank.
- If you default on your payments you could lose your home.
Why You Should Avoid Both Options
Using either of these two options should be a last resort. Both options cost money, both options still leave you with payments to be made, and neither solve the root of the problem.
Typically, the root of the problem is the person using that credit card. That’s you. It may be tough to read this but credit card debt is avoidable 99.99% of the time. Yes, there may be circumstances that come up where you need to use a credit card for an emergency, but those should be few and far between.
Sit down and think about how you got into that situation in the first place. Why did you overspend? Was it a one-time thing or do you see a pattern?
If the answer is the latter, then get rid of the credit card altogether. Once you have proved to yourself that you can follow the golden rule of credit cards then you can get it back. For a refresher here is that rule:
Pay off your credit card statement balance in full every single month and never carry a balance.
Also, if you need a refresher on what a credit card is and how to use it properly read: How Do Credit Cards Work? – A Simple Guide With Examples
Other options you should consider as well are asking the credit card company for a lower interest rate. This is referred to as the APR. You can also apply for a balance transfer to a lower rate card.
No matter your choice, make sure you solve the root problem first.
The Bottom Line
While it is unusual to see credit card debt rolled into a mortgage, there are other ways to improve your debt situation by using your mortgage.
Cash-out refinancing and home equity lines of credit are both powerful tools that can be used to help you get rid of that pesky credit card debt once and for all.
While these aren’t my first suggestions for tackling credit card debt, I do understand that life happens. Sometimes we need to take drastic measures to get out of bad situations. I’m simply happy you’re here and learning to handle your money better.
Just make sure that after you finally pay that card off, you never go into credit card debt again. Make the balance payment in full every month or get rid of the card altogether. Remember that credit cards can be a useful tool but they should never be holding you back.
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