Consolidating Your Bills with a Home Loan – A Complete Guide

Dealing with multiple high-interest debts like credit cards personal loans and medical bills can be stressful. The minimum monthly payments on each of these debts can take a huge bite out of your paycheck, making it hard to save or get ahead financially. This is where consolidating your bills into a home loan can help.

In this comprehensive guide, we’ll cover everything you need to know about using a home loan to consolidate debt, including:

• What is bill consolidation?
• Benefits of consolidating bills with a home loan
• Risks and considerations
• Eligibility requirements
• How to apply
• Alternatives to consider

What is Bill Consolidation?

Bill consolidation simply means combining multiple debts into one single loan. This is commonly done by taking out a home equity loan or refinancing your mortgage and getting cash out to pay off your other debts. The result is you now have just one monthly payment on your home loan, often at a lower interest rate, rather than keeping up with payments on multiple credit cards, personal loans, etc.

Consolidating through a home loan allows you to tap into your home equity – the current value of your home minus what you still owe on your mortgage. So if your home is worth $300,000 and you owe $180,000 on your mortgage, you have $120,000 in equity available. Lenders typically let you borrow up to 80-90% of your total equity

Benefits of Bill Consolidation Loans

There are several potential advantages to consolidating your debts into a home loan:

• Lower interest rate – Home loans usually have much lower interest rates than credit cards and other debts. The average credit card rate is around 17% APR compared to 5-8% for a home equity loan. This means you’ll pay less interest over time.

• Single payment – Instead of tracking multiple due dates and payments, you’ll have just one monthly payment to worry about. This simplifies your finances.

• Pay debts faster – If you get a lower rate through a home loan, more of your payment goes to paying down the principal balance each month. This can help you knock out debts ahead of schedule.

• Increase monthly cash flow – Consolidating at a lower rate also lowers your required monthly payment. This frees up room in your budget to save, invest, or cover other goals.

• Access larger amounts – You can tap more of your home equity than you could get approved for with a personal loan or balance transfer credit card. This allows you to consolidate more debt.

• Tax benefits – The interest paid on a home loan is usually tax deductible, which can lower your tax bill. Credit card interest and personal loan interest is not deductible.

Risks and Considerations of Home Equity Debt Consolidation

While using home equity to consolidate bills can be smart in many cases, there are some risks to note:

• Your home is collateral – With a home equity loan or cash-out refinance, your home secures the debt. Failure to repay could result in foreclosure. This differs from non-collateralized debts like credit cards.

• Closing costs – Refinancing and home equity loans come with upfront fees of 2-5% of the total loan amount. These include origination fees, appraisal fees, and more. Factor this into your breakeven analysis.

• Lower home equity – Your loan balance increases when you consolidate debt into your mortgage. This means you have less equity remaining for future financial needs until you pay down the loan.

• Interest rates could rise – Home loan rates fluctuate over time. If you consolidate at a low rate now, a rate hike later could erase your expected savings. Consider a fixed rate loan to lock in low rates.

• Longer debt repayment – Consolidating short-term debts like credit cards into a 30-year mortgage extends your repayment timeline. Make extra principal payments when possible to counter this.

Weigh the pros and cons carefully based on your specific financial situation. Speak with a loan officer to run the numbers and see if consolidation makes sense.

Who Qualifies for a Home Equity Bill Consolidation Loan?

To qualify for a home equity loan or cash-out mortgage refinance, you’ll need:

• Adequate home equity – Most lenders require at least 15-20% equity in your home to approve you. The more equity you have, the lower your interest rate may be.

• Good credit – Minimum credit scores range from 620-680, but you’ll get better terms with 700+ scores. Check your credit reports and dispute any errors.

• Manageable debts – Lenders will review your full debt-to-income ratio, including the new consolidated loan payment. Keep your ratios within advised limits.

• Sufficient income – Having stable income each month is key, especially if you are self-employed or have variable income sources. Provide documentation to verify this.

How to Apply for a Home Loan to Consolidate Debt

Follow these steps when applying for a home equity consolidation loan:

1. Check your credit reports and scores using a site like AnnualCreditReport.com. Dispute any errors with the bureaus.

2. Get current statements on all your debts you want to consolidate. This provides the exact payoff amounts.

3. Determine your home’s current market value and your owed mortgage balance to calculate your equity.

4. Shop and compare loan offers from multiple lenders. Apply with the lender that provides the best terms.

5. Complete the loan application providing information on your income, debts, employment, and assets.

6. Allow time for the lender to appraise your home’s value and underwrite your loan eligibility.

7. Carefully review the final loan estimate and closing disclosure forms before signing your loan documents.

8. The lender pays off your debts directly with the loan proceeds so you get a clean slate!

Start the pre-approval process online to view customized loan offers after just a few steps.

Alternatives to Home Equity Consolidation Loans

If consolidating into your home loan doesn’t make sense for your situation, here are a few alternatives to consider:

• Balance transfer credit card – Transfer your balances to a 0% intro APR card to save on interest for 12-18 months while you pay down debts.

• Personal loan – Unsecured personal loans have fixed rates from 5-36% APR from online lenders and credit unions. No home collateral required.

• 401(k) loan – Borrow from your 401(k) up to 50% of the vested balance, up to $50,000. Interest goes back into your account.

• Debt management plan – Work with a nonprofit credit counselor to negotiate lower rates and consolidate debts into one payment each month.

• Debt settlement – Debt settlement companies negotiate to settle your balances for less than you owe. There are risks to be aware of.

• Bankruptcy – Filing for Chapter 7 or Chapter 13 bankruptcy eliminates many debts entirely or restructures payments. Major impacts to credit.

The Bottom Line

Bill consolidation using home equity can simplify your finances, reduce your interest costs, and provide needed breathing room in your budget. But it also puts your home on the line so it’s not ideal for everyone’s situation. Crunch the numbers carefully, know the risks, and explore all your options to find the smartest debt payoff strategy.