You should avoid using a personal loan to pay for college tuition, investments, basic living expenses, vacation, discretionary purchases and gambling, as well as a down payment and the costs associated with starting a business.
Personal loans are an effective financing tool for consolidating high-interest debt, funding a home renovation project or achieving another financial goal. They typically have fixed payments, fast funding and lower interest rates than other forms of credit.
You can use personal loans for nearly any legal purpose. But as the old saying goes: “Just because you can, doesnt mean you should.” In other words, many common usages for personal loans may not be in your best financial interests. You should avoid using a personal loan for the following purposes:
Paying your mortgage is likely one of your largest monthly bills. If you’re facing financial hardship and are struggling to make your mortgage payments, you may be wondering if you can use a personal loan to pay your mortgage.
Using a personal loan to pay your mortgage is possible but there are some important factors to consider before taking this route. In this article we’ll go over the key things you need to know about using a personal loan to pay a mortgage, including
- The pros and cons of paying a mortgage with a personal loan
- How it can affect your credit and eligibility for a future mortgage
- Alternative options beyond a personal loan
- Tips for managing your mortgage payments
The Pros and Cons of Paying Your Mortgage With a Personal Loan
Taking out a personal loan to pay your mortgage has some potential benefits, but also comes with some downsides to weigh.
Potential Pros
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Consolidates debts into one payment If you take out a larger personal loan, you may be able to roll your mortgage payment into the loan This consolidates multiple debts into one predictable monthly payment
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May offer better rates than credit cards: Personal loans often have lower interest rates compared to credit cards. If you’re using high-interest credit card debt to cover your mortgage, a personal loan could provide savings.
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Quick access to funds: Personal loan funding is usually quicker than other financing options. You may be able to get funds deposited in your account within a week or less after approval.
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Fixed payments and terms: Personal loans come with fixed interest rates, monthly payments, and terms. This allows you to budget and know exactly what to expect each month.
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May build your credit: If you make all your payments on time, a personal loan can help build your credit history and improve your credit scores over time.
Potential Cons
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Higher interest than mortgage rates: Personal loan rates are almost always higher than mortgage rates. It will likely cost more over time to pay your mortgage via a personal loan.
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May not be enough to cover full balance: Many personal loans top out at $50,000, which may not be enough to cover a hefty mortgage balance. You’ll still need to make your remaining mortgage payments.
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Need sufficient income to qualify: Lenders want to see you have enough income coming in to manage this additional monthly payment. If your debt-to-income ratio is already high, you may not qualify.
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Missed payments hurt your credit: Just like missing mortgage payments, failing to pay your personal loan on time can negatively impact your credit standing. Missed payments make it harder to qualify for loans in the future.
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Doesn’t build home equity: Paying extra interest with a personal loan doesn’t build equity in your home like paying down your mortgage principal does.
As you can see, using a personal loan for your mortgage has some potential situations where it may be helpful, but also carries risk. Be sure to consider both the pros and cons carefully.
How a Personal Loan Can Affect Your Credit & Future Mortgage Eligibility
Beyond the basic pros and cons, utilizing a personal loan for your mortgage can have some direct impacts on your credit and ability to qualify for mortgages in the future. Here are some specific effects to keep in mind:
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More hard inquiries on your credit report: When you apply for a personal loan, the lender will conduct a hard inquiry on your credit report. Multiple hard inquiries can temporarily ding your credit scores.
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Higher credit utilization: Your balance on the personal loan will report to the credit bureaus. A higher credit utilization ratio can negatively affect your scores if you max out the loan.
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Potentially lower credit mix: Replacing your mortgage with a personal loan installs installment loan debt in place of mortgage debt. This less diversified credit mix may have a minor negative influence on your scores.
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** Delayed mortgage eligibility:** Most lenders require at least 2 years of credit history to qualify for a mortgage. If you pay off your mortgage, you’d have to wait before getting approved again.
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Tougher to meet debt-to-income requirements: Your new monthly loan payment will make it harder to meet lenders’ income-to-debt qualifications when applying for another mortgage.
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Lower chance of better rates: Good credit and diverse credit mix is key for the best mortgage rates. The impacts above could prevent you from securing the lowest rates when reapplying.
For many homeowners, these potential consequences make using a personal loan less than ideal. Talk over options with a financial advisor or mortgage specialist before committing.
Alternatives Beyond a Personal Loan for Paying Your Mortgage
Using a personal loan is just one route to cover mortgage payments. Depending on your specific situation, there may be better options to explore:
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Mortgage refinancing: Refinancing your mortgage at a lower interest rate could help lower your monthly payments to a more affordable level. Closing costs may apply.
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Home equity loan: A home equity loan uses your home’s equity as collateral, typically offering lower rates than personal loans or credit cards. Fees may be incurred.
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HELOC: A home equity line of credit (HELOC) provides a revolving credit line at a variable interest rate. You only pay interest on what you use. Approval for the credit line is required.
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Federal mortgage programs: Government-sponsored programs like mortgage forbearance or loan modifications can provide tailored assistance for those facing hardship. Eligibility requirements must be met.
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Budgeting and cutting expenses: Finding ways to cut monthly spending to allocate more towards your mortgage avoids taking on additional debt. But may require some sacrifice.
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Part-time income: Bringing in extra income from a side gig or part-time job can give your budget breathing room to handle mortgage payments. More time commitment is involved.
Depending on your financial situation, a combination of the above options may be best. Consulting an expert can help identify the right approach.
Tips for Managing Your Mortgage Payments
If you’re having trouble keeping up with mortgage payments, either now or in the future, focus on mortgage management strategies. Here are some tips:
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Make mortgage payment your top monthly budget priority. Cut expenses in other areas first before missing a payment.
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Build an emergency fund with 3-6 months’ worth of mortgage payments as a buffer for income disruptions.
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Avoid unnecessary large purchases that aren’t urgent to allocate more cash towards your mortgage.
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Refinance your mortgage if you can get at least 0.5% lower rate to reduce interest costs. Closing fees may apply.
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Call your mortgage lender immediately if you anticipate falling behind on a payment. Discuss forbearance or modification options.
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Consider downsizing your home or renting out rooms if the payment is no longer affordable based on your income.
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Supplement with part-time work if possible, like rideshare driving or tutoring. Use that income just for your mortgage.
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Speak to a housing counselor or financial advisor for guidance on managing mortgage debt. They can help assess your full situation.
Staying on top of your mortgage payment is key to keeping your housing and to maintaining a strong credit profile. With prudent budgeting and planning, you can avoid needing to resort to riskier options like personal loans.
The Bottom Line
Using a personal loan to directly pay your mortgage is possible in some cases. But it’s an option to approach carefully and as a last resort only. It carries risk of higher interest costs, credit impacts, and missed payment consequences down the road.
Thoroughly compare interest rates and terms if you do pursue this route. And have a repayment plan to ensure you can manage the monthly payments responsibly. Otherwise, exploring alternatives like refinancing, borrowing against your home equity, or seeking assistance programs may be smarter long-term choices before turning to personal loans.
With prudent planning, budget adjustments, and cutting unnecessary costs where feasible, you can likely find ways to keep up with mortgage payments without need for costly debt consolidation. But if you do require additional financing, discuss your entire financial situation with advisors. That will help determine if a personal loan, or a different dedicated mortgage solution, may be appropriate in your specific circumstances.
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Covering Basic Living Expenses
Is a personal loan a good idea when youre strapped for cash and need to pay bills? Not usually.
A personal loan may indeed be a viable option to help you address a temporary hardship if you have a solid plan for getting back on your feet financially and repaying the loan. But, you could create a more significant problem in the long run since youll have to repay all the money you borrow plus interest.
If your income is insufficient to cover the bills, it may be time to re-examine your budget. Look for areas where you can cut costs, like forgoing restaurants in favor of cooking meals at home or canceling unused subscriptions. Also, try to identify opportunities to increase your income. For example, you might request a raise, offer to work overtime or start a side hustle.
Pay Off Any Amortized Loan Quickly! Mortgage Interest is TOO High of a Price to Pay for a Home!
Is a personal loan the best way to finance a home?
Although usually a mortgage loan is the best approach to financing a home, there are situations in which it might not be. For example, if you have a high-risk variable-rate mortgage, you might choose to pay off your mortgage with a reasonable fixed-rate personal loan.
How do I get a mortgage if I have a personal loan?
To get a mortgage, you’ll need to meet specific criteria your lender uses for approval. Your credit history and the types of loans you’ve used or are currently using can affect some of these eligibility requirements. Before applying for a mortgage, consider how your personal loan could impact the following factors.
Can I pay off my mortgage with a personal loan?
A home mortgage is usually a long-term commitment, but if you want to own your home free and clear, you can pay off your mortgage at any time. Using a personal loan to pay off the mortgage generally isn’t recommended because of higher interest rates, but other considerations sometimes come into play.
How do I pay my mortgage?
During your first month of enrollment, you must pay both your regular monthly payment plus your two half payments. After, you’ll start paying half of the total monthly mortgage payment every two weeks via recurring debits. Visit a branch. Find a branch to make your payment in person at any of our locations. Pay by phone.