Buying a new home when you have credit card debt is a big commitment; not paying off your credit card debt before taking out a mortgage may mean a lower credit score, making it difficult to get the best interest rates. Before consolidating your credit card debt into your mortgage, consider all the angles, including alternatives, such as low-interest credit card consolidation loans that some banks offer.
Loan to Value
Credit card debt that you consolidate into a mortgage adds to the balance of the loan. During the underwriting process, a bank looks at the amount you will need to borrow vs. the current property value. A home that has a market value of $120,000 will need a $24,000 down payment to establish 20 percent equity. If the bank requires 20 percent equity and you wish to consolidate $10,000 in credit card debt, you will need to increase your down payment to $26,000.
Secured Debt
Consolidating credit card debt into a mortgage means your home secures the debt. Adding unsecured debt to a mortgage means a larger monthly payment or a longer loan. If you are unable to make your mortgage payments, you risk foreclosure. Credit card debt is unsecured; if you fail to make payments the bank does not have any property to take back from you.
Costs
Consolidating credit card debt if into your mortgage could cost you more. Mortgage interest rates are lower than credit card interest rates, but increasing the size of your mortgage loan with credit card debt can result in a higher interest rate or add a mortgage insurance premium, according to The Mortgage Professor. For example, If you have $15,000 of credit card debt at 12 percent interest, and an offer of a mortgage of $270,000 at 6 percent interest, increasing the mortgage to $285,000 could increase the mortgage interest rate or the mortgage insurance premium enough to wipe out any savings.
Advantages
Buying a home and consolidating your credit card debt into the mortgage can reduce your monthly expenses. Some find it difficult to keep up with the minimum payments that credit card companies require for large amounts of debt, such as $10,000 or higher. Home ownership can sometimes give you the advantage of a lower housing payment. In addition, unlike interest you pay on credit card debt, the interest you pay on a mortgage is tax deductible. Owning a home can also give you more space for the same dollar amount that you pay in rent.
References
- The Mortgage Professor: Consolidating Debt With a New Purchase Mortgage
- The Free Dictionary: Debt Consolidation
- MSNBC: Refinancing? Weigh Risks of Debt Consolidation
- MyFico.com: Credit Scoring
- MyFico.com: How to Repair Your Credit and Improve Your FICO Credit Score
- Wells Fargo: Credit Card Consolidation Loans & Debt Consolidation
Writer Bio
Helen Akers specializes in business and technology topics. She has professional experience in business-to-business sales, technical support, and management. Akers holds a Master of Business Administration with a marketing concentration from Devry University's Keller Graduate School of Management and a Master of Fine Arts in creative writing from Antioch University Los Angeles.