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Too Much Holiday Spending? How to Consolidate Debt

Klarity Link,  Mortgage Advisor Processing Manager

January 9, 2023 — 7 min read

Too Much Holiday Spending? How to Consolidate Debt

Have you been reviewing bills and wondering how to cut back on monthly payments? Don’t worry, you’re not alone—in fact, debt consolidation is a common quest this time of year! However, whatever the reason you want to consolidate debt—whether you lost track of holiday spending or you want a lower interest rate—there are several options to choose from, including a home equity line of credit or a cash-out refinance. Before moving forward, take a minute to review the important pros and cons of taking out a larger mortgage to clear out other debt.

How Does Debt Consolidation Work?

Debt consolidation involves merging multiple debts into a single monthly payment with a lower interest rate; it’s an extremely effective strategy for borrowers with debt that carries high interest, such as debt from credit cards, medical bills, or other unsecured loans.

Paying off multiple debts with a new loan and one monthly payment may help:

  • Reduce your overall monthly expenses and boost cash flow
  • Reduce stress with fewer bills to manage
  • Progress towards savings goals more quickly
  • Reduce your credit utilization ratio, which may improve your credit score

Keep in mind, while some types of debt can be a helpful way to help achieve long-term financial goals, high-interest debt can be a big drag on your finances. If you currently own a home, increases in home values mean you probably have access to a Home Equity Line of Credit (HELOC), which may make it easier to manage.

RELATED: A Complete Guide to Using Your Home Equity

Consolidate Debt Using a Home Equity Line of Credit (HELOC)

In short, a home equity line of credit allows you to borrow against your home equity to access cash when you need it; you can pull and repay all or some of the cash monthly, kind of like a credit card, but with a lower average interest rate. Because of its lower rate, a HELOC may be an effective option to consolidate your debt and/or eliminate high-interest balances sooner.

However, using a HELOC for debt consolidation isn’t the right choice for everyone—if you’re consistently late on payments or tend to miss payments altogether, you may put your home at risk of foreclosure. That’s because this loan uses your home as collateral. If you’re having trouble making existing payments, you may want to search for alternative ways to consolidate debt.

Additionally, keep other costs, such as appraisal fees or closing costs, in mind when considering this option. If you have a lot of debt to consolidate, paying these added fees may make sense, but it’s still smart to compare.

Important product highlights:

  • 680 credit score or higher required
  • 45% max debt-to-income ratio (DTI)
  • Eligible for owner-occupied, second-home, and investment properties
  • Line of credit min $50,000/max $500,000
  • Prior-use appraisals are accepted for up to 12 months

It’s important to note—you must have substantial equity (at least 20%) before you can qualify for a HELOC (or a home equity loan). This means that generally, new homeowners can't immediately start borrowing against the value of their homes.

Too Much Holiday Spending? How to Consolidate Debt

Consolidate Debt Using a Home Equity Loan

One other option is a home equity loan—this loan enables you to borrow money by leveraging the equity you’ve built up in your house—that is, the share of your that you own versus what you owe of the mortgage.

When you use a home equity loan to pay off debt, you’re cashing in the equity you’ve built up and swapping numerous monthly payments with different rates for one fixed interest-rate payment. If you own your home, you may have spent years building equity in it; that’s why if you’re considering using this home finance option for debt consolidation, you must give its pros and cons equal consideration; remember, if you default on the payment, you could face foreclosure.

Important Product Highlights:

  • To qualify for this loan, you must have a good credit score—the higher, the better your chances are of qualifying for a home equity loan with favorable terms
  • You must also show a positive payment history on credit accounts, including your mortgage (i.e., no recent missed payments)
  • You must have a favorable debt-to-income ratio
  • You must have built up at least 20% equity in the property

RELATED: How Best to Build Home Equity if Mortgage Interest Rates Rise

Consolidate Debt Using a Cash-Out Refinance

Did you know you can use funds from a cash-out refinance for almost anything, including things like credit card debt, medical bills, and home repairs?

If you decide to go with a cash-out refinance, you will replace your current mortgage with a new mortgage for a higher amount and will receive the difference in cash at closing.

However, before moving forward, you’ll want to determine the specific debts you want to pay off and how much cash you will need to do that. The amount of cash-back available to you is calculated by subtracting your existing mortgage from your maximum refinance loan amount. Keep in mind, it may not be wise to borrow more than is necessary since you will have to pay it off with interest over time.

Important Product Highlights:

  • To utilize this option, you must have at least 20% equity in your home
  • You must have a credit score of at least 620
  • You must have a debt-to-income ratio of 43% or less
  • Be willing to submit to a new appraisal

To see if you qualify for a cash-out refinance, complete an online application here, or reference these resources:

Too Much Holiday Spending? How to Consolidate Debt

Consolidate Debt Using a Student Loan Cash-Out Refinance

Similar to a regular cash-out refinance, a student loan cash-out refinance allows you to bundle your student debt into your refinanced mortgage, if applicable. Keep in mind, while the balance on your student loan account will be reduced to nothing, you will still be responsible for this dollar amount as part of your refinanced mortgage.

Important Product Highlights:

  • To utilize this option, you must have at least 20% equity in your home
  • You must plan to use the funds to completely pay off your student loan debt
  • You must have a credit score of at least 620
  • You must have a debt-to-income ratio of 43% or less
  • Property cannot be listed for sale at the time of disbursement

RELATED: Student Loans and Getting a Mortgage: What You Need to Know

Other Ways to Consolidate Debt

Personal loans may be a good option for borrowers who don’t want to risk losing their home, despite coming with a potentially higher interest rate. Balance transfer credit cards may be another option If you decide to go this route, make sure that the combined amount of debt you’re transferring is beneath your credit limit. Finally, there are nonprofit credit counseling agencies that will work with you to create a plan that is perfect for your life and financial goals.

Ready to Take the Next Step?

If you’re ready to take control of your debt, PacRes Mortgage provides an easy and efficient application process—plus, your neighborhood Mortgage Advisor is here to provide support through every stage of the process. Reach out today or check out one of our other blogs here.

Terms are subject to change without notice. Qualified borrowers only, credit on approval. This is not a commitment to lend. Call for details. Qualified borrowers only, credit on approval. Arizona Mortgage Banker License BK-0945669. (C) 2022 Pacific Residential Mortgage, Inc.

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