If you have equity in your home (you owe less than the home’s value), you may use that equity for any purpose including paying off debt. While it might seem scary to wrap your debt into your home, here’s why you should consider it.
Your credit score is made up of many parts including the amount of outstanding debt versus your credit lines. If you have a large amount of credit card debt and have over 30% of your credit lines outstanding, it’s hurting your credit score.
When you consolidate your credit card debt into your home loan, you free up your credit cards, which will help your credit score. Just make sure you keep your credit cards open and don’t rack up more debt to realize the benefits.
If you’re paying 14.99%+ for credit card interest, you’ll easily save money when you consolidate your debt into your home equity. In Canada, if you can get a home equity loan for a 2% - 3% rate, you’ll save money on interest and may be able to afford to make extra payments toward the principal to pay your debt down faster.
If you have an overwhelming amount of debt, it’s easy to miss a payment or be unable to make one. A missed payment can hurt your credit score the most (once it’s 30 days late). When you consolidate your consumer debt into your mortgage, you have one bill to pay and are less likely to have any late payments.
If you’ve tried consolidating debt with a balance transfer credit card or unsecured personal loan, you may not have been approved for a loan amount high enough to pay off your debt. This leaves you with either a portion of your funds consolidated with the other high interest debts remaining or you don’t consolidate at all.
With a home equity loan, you can tap into up to 80% of your home’s value minus any first mortgage debt you have outstanding. This may leave you more room to consolidate your debt and fix your credit.
Consolidating your debt with home equity loans takes some careful thought. If you do it right, it can be the least expensive way to consolidate your debt and it may help you improve your credit score.
Before you consolidate your debt, create a plan so you don’t rack up credit card debt again. Wrapping the debt into your home’s equity will help you get out of debt and plan for the future, but only if you use it right. It’s not a free pass to rack up your credit cards again. Don’t close them, but lock them up so you don’t use them moving forward.