Is It Possible to Roll Debt Into a Mortgage?

With the cost of living continuing to rise many Americans are finding themselves strapped with high amounts of debt from credit cards, auto loans, and other sources. As interest rates keep accumulating paying off this debt can feel like an impossible task. This leads many homeowners to wonder – is it possible to roll debt into a mortgage?

The short answer is yes, you can combine your debts into one new mortgage. However, there are some important things to think about before going this route. In this article, we’ll explain how debt consolidation works with a mortgage, list the main pros and cons, and give first-time homebuyers who want to deal with debt some advice.

How Debt Consolidation Works With a Mortgage

Debt consolidation with a mortgage is a type of cash-out refinance that lets you borrow more than you currently owe on your home loan. You can then use those extra funds to pay off any unsecured debt like credit cards, personal loans, and car loans.

Essentially, you are converting multiple high-interest debts into one single low-interest loan in the form of a mortgage Your new monthly payment goes entirely toward your new consolidated mortgage balance

The steps are the same for both current homeowners who want to refinance and first-time home buyers who want to get a new mortgage loan. The main difference is that most of the time, new buyers have to put down a bigger down payment.

Here are some key points on how it works:

• Your new loan amount is for your existing mortgage balance plus the debts you want to consolidate. For example, if you owe $100,000 on your current mortgage and want to roll in $20,000 of credit card debt, your new loan would be for $120,000.

• You need enough home equity or cash to cover a down payment on the new higher loan amount. Lenders want your new loan-to-value ratio (LTV) to stay under 80-90%.

• Interest rates are based on your credit score, income, and other mortgage qualifications. Rates are generally lower for mortgages than credit card or personal loan debt.

• The new, single payment you make each month goes toward the loan’s principal and interest. You won’t have to set aside separate funds to pay off the debts you rolled in.

• Closing costs apply, usually 2-5% of the new loan amount. These fees cover lender origination, appraisal, title search, and more.

The Pros of Debt Consolidation With a Mortgage

If done correctly, rolling debt into a mortgage can provide the following benefits:

• Lower interest rate – Mortgage rates are almost always lower than credit card rates, which average around 16%. Even a rate of 5% on a 30-year mortgage can save a lot on interest fees.

• Simplified payment – Making just one monthly payment is easier to manage than tracking multiple credit card and loan payments.

• Pay debt faster – The set repayment schedule of a mortgage can help you eliminate debt quicker than minimum credit card payments.

• Tap home equity – Existing homeowners can leverage equity they’ve built up to consolidate at a lower loan-to-value ratio.

• Tax benefits – Mortgage interest is usually tax deductible, unlike personal loan or credit card interest.

The Cons of Debt Consolidation With a Mortgage

However, rolling debt into a mortgage also comes with some risks:

• Closing costs – You’ll pay 2-5% of the new loan amount in upfront origination fees, appraisal cost, and more closing costs.

• Higher monthly payment – Even with a lower interest rate, your new payment could jump by hundreds of dollars per month.

• Longer repayment term – A new 30-year mortgage restarts the clock, versus a 3-5 year loan repayment.

• Less home equity – Your loan balance increases, decreasing the equity built up in your home.

• Potential overspending – Easy access to credit could tempt you to accumulate new debt all over again.

Tips for First-Time Homebuyers With Debt

For prospective first-time home buyers, rolling debt into a mortgage involves some extra planning and precautions. Here are some tips to prepare:

• Save up a 20% down payment if possible, to get the best mortgage rates and terms.

• Shop around with multiple lenders and compare interest rates and closing costs. Online lenders often offer competitive rates.

• Examine your budget carefully to ensure you can handle the new monthly payment, and cut unnecessary spending if needed.

• Ask lenders if you can qualify for a mortgage program for first-time buyers, like FHA or VA loans that allow smaller down payments.

• Consider meeting with a nonprofit credit counselor to go over your full financial picture and alternative debt payment options.

• Be prepared to show timely monthly payments toward your current debts to prove you can manage the new consolidated mortgage responsibly.

• Know the maximum debt-to-income ratio lenders will accept, and how your specific income and debts factor into the calculation.

Weighing the Pros and Cons

Ultimately, the question of whether or not to roll debt into a mortgage comes down to weighing the pros and cons for your unique situation. While it can provide lower interest rates and consolidated payments, the closing costs and risks involved mean it’s not the right path for everyone struggling with high debt. Carefully consider all alternatives like balance transfer credit cards, personal debt consolidation loans, or nonprofit credit counseling before making the decision.