If you have high-interest credit card debt, chances are the interest rates are enough to make you wonder if you'll ever pay the balances off. If you have significant home equity, though, you may be able to consolidate that high-interest debt into your home mortgage. The result is one payment instead of several, and most likely a lower overall interest rate for your consumer debt. How does it work?

3 methods of borrowing against home equity

There are three main ways of accessing your home equity:

  1. Home equity loan. With a home equity loan, you borrow a lump of sum of money, which comes out of your home equity. You can use the lump sum to pay off your credit card debt. Typically the interest charged on a home equity loan will be lower than the interest charged on a credit card. In addition, the interest on the loan may be tax deductible. A home equity loan is sometimes referred to as a second mortgage, because it's generally a mortgage on top of your first mortgage, used to purchase your home.
  2. Home equity line of credit. A line of credit works like a credit card with a credit limit. You qualify to spend against your line of credit up to the limit, and you only access the line of credit when you need it rather than in a lump sum. A home equity line of credit has an adjustable interest rate, usually tied to the prime rate, so your payments could rise if interest rates increase.
  3. Cash-out refinance. You may be able to refinance, replacing your current mortgage with a new mortgage carrying a larger balance. The difference is your cash out from the refinance, which you can use to pay off your credit card debt, just like with the proceeds of a home equity loan. (Even if you don't do a cash-out refinance, today's lower mortgage rates may still save you money each month, savings which you can use to pay down your credit cards faster.)

Advantages of debt consolidation with a mortgage

Any of these methods can be considered ways of debt consolidation, which is the idea that you combine multiple debts into one credit account for administrative ease and possibly lower interest rates.

Debt consolidation makes it less likely that you'll miss a payment because of poor organization; you only have to keep track of one payment. Moreover, because a mortgage is secured by your home -- meaning a lender can foreclose and be sure of getting at least the value of your home should you default -- a lender is more likely to give you a lower rate of interest than your credit card companies. When your interest rate is lower, it's far easier to pay down your debt because it grows much more slowly.

Qualifying for a debt consolidation loan on your home

Unfortunately, the financial crisis had two effects that have made this form of debt consolidation less accessible.

First, home prices have fallen or flatlined in many markets, so that many homeowners have less home equity available. Home equity is the market value of a home minus the balance owed on the mortgage. If housing prices drop, so does home equity. (In many places, home prices have dropped enough to push homeowner equity into the negative range. This situation is referred to as "being underwater.") Moreover, if a home ends up in a foreclosure sale, the sale proceeds are often not enough to pay back both the lender on the first mortgage and lenders of second mortgages or home equity loans.

Second, lenders are now far more conservative in approving borrowers for home loans, and many borrowers' credit histories have suffered in the poor economy. Even borrowers with good credit need at least 30 percent home equity to qualify, and individuals with high credit card debt may not have a good credit score.

However, despite the barriers, if you think you have significant home equity available, debt consolidation with a mortgage may be one of your best financial moves. Find out if you qualify by entering in your information in the form on this page.

A final word: If you refinance your mortgage or take out a home equity loan or line of credit to pay off credit card debt, be sure to think hard about whether you can repay the new loan. You'll also need discipline to avoid taking getting into credit card debt again. Make sure you don't pay the ultimate price for too much borrowing: losing your home.

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