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As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.

Credit cards are convenient things. They mean we don’t have to carry cash around, and if we don’t have the cash for an important expense right now, we can put it on the card and pay it off over time if we have to.

Unfortunately, credit cards also make it easier to get into debt. Even if you’re being careful, one big expense can put you in a tough spot. The good news is there may be a way to make the debt more manageable by utilizing your home equity to do a debt consolidation at a lower interest rate than you would get on the credit card.

We’ll go over how a cash-out debt consolidation could help you get on better financial footing. Before that, let’s take a look at the scope of the problem.

How Much Debt Do We Have?

If you have credit card debt, you’re not alone. According to NerdWallet, the average American household carrying credit card debt has balances totaling $16,748. In 2016, those balances added up to $779 billion nationwide. The average consumer carrying a balance paid roughly $1,292 in interest per year.

It may seem like the easiest solution to this problem is to avoid putting anything on the credit card that you can’t afford to pay off. While this is solid advice in general, life isn’t always that simple.

The Federal Reserve conducts periodic surveys of U.S. households to determine their economic well-being. This statistic jumped out at me: Among those who said they had a major unexpected medical expense, the median out-of-pocket cost was $1,200, and the mean expense was $2,383. That’s a good chunk of change that not everybody has.

Let’s take a look at the cost over time.

Quantifying the Payments

In order to give an example of how much this could really add up to, I’m going to take the average credit card debt of $16,748. The average credit card rate as of this writing, according to Bankrate, is 16.28%. I’m going to assume a minimum monthly payment amount of 3% of the total balance.

If you’d like to put in your own numbers, there are a variety of online calculators.

In the above scenario, your minimum monthly payment would be $502.44. It would take you 21 years to pay off, and you would pay $13,583.69 in interest.

The numbers are staggering and can throw you for a loop if you spend any time thinking about it. Fortunately, there’s a resource many of us have that may help us climb out of the hole while spending less money on interest.

Using Your Home Equity to Consolidate Debt

If you have some untapped equity in your home, you can take a look at consolidating debt. We’ll go over how that works, but first, let’s give a quick primer on home equity.

The Equity Equation

You can think of equity as how close you are to owning your property outright. With each payment and each time your property value increases, you’re gaining more equity in your home.

The amount of equity you have in your home is measured by your loan-to-value (LTV) ratio. Let’s say you bought a home for a purchase price of $100,000. You had a 5% down payment, which means you start out with a 95% LTV. Over the next few years, you pay down the principal on the loan to $87,000. Meanwhile, your appraised property value has increased to $110,000.

To find your LTV, you take the unpaid principal balance and divide by the current value of your home. In the above example, your current LTV would be about 71%.

The reason this number is important is you have to have a certain amount of equity in order to take cash out. The amount you need depends on the number of units in the property, whether the loan is fixed or adjustable, and who backs the loan (Fannie Mae, Freddie Mac, the FHA, etc.).

When you do a cash-out refinance, the major mortgage investors will require you to leave a certain amount of equity in the property. This is important because if the maximum LTV is in the range of 80% to 85%, you’ll have to make sure that removing the equity still gives you enough money to accomplish your goals. For those eligible for a VA loan, it is possible to take out a loan for the full appraised value of your home, but you need a conforming loan amount and 680 median FICO score. Now that we’ve gone over how equity works, let’s get down to business.

Tackling Your Debt

In debt consolidation, you use the proceeds from a cash-out refinance in order to pay off any existing debts. Up to this point, we’ve discussed high-interest credit cards, but it could be used to pay off things like student or personal loans as well.

You’re essentially paying off any existing balances and transferring them to your mortgage. However, you’ll be paying a much lower rate of interest. The average rate on a 15-year fixed mortgage, as of this writing, is 3.5%, according to Freddie Mac.

Let’s say you had $133,000 left on your mortgage balance. If you took $17,000 worth of equity out of your home to pay off credit card debt, you would have a $150,000 mortgage. You would pay about $43,000 in interest on the entire mortgage at a rate of 3.5%.

What’s really cool about this, though, is that we’ve been able to roll the credit card debt in at a much lower interest rate. Instead of paying almost $13,600 at the credit card rates mentioned above, the interest you’re paying on the $17,000 you took out of your home is actually closer to $4,900.

If you want to experiment with how much you could save, check out our amortization calculator. There’s no reason to keep carrying high-interest debt if you can help it.

Do you like what you’re reading? You can go ahead and get a full refinance approval online through Rocket Mortgage®. If you would prefer to speak with one of our friendly and knowledgeable Home Loan Experts, we would be happy to take your call at (800) 785-4788.

Do you have questions? Maybe you have success stories about all the things you were able to accomplish by consolidating debt. Share in the comments.

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This Post Has 12 Comments

  1. Our home is worth about $160,00, we owe $103,000. We want to refinance to consolidate debt. Credit score 620. DTI > 50%. My husband has a VA ceificate. Can you help us.

    1. Hi Pat:

      Thank you and your husband for your service! We can certainly help you look into your options to consolidate debt through a refi. If you want to start the process online, you can do so through Rocket Mortgage. Otherwise, one of our Home Loan Experts would be happy to take your call at (888) 980-6716. Enjoy the rest of your weekend!

  2. OkayI want to refinance my home I owe 75,000 bought 2 years ago put 50,000 cash down. So I owe 75,000 on it I pay allied morgage the onthly payment it was bought by me through a couple that financed me I am paying 7 percent interest yuk there is pre paid penalty for the first five to seven years but I can live with that. Am interested in 15 year or 30 year home refinance. My current morgage company does not report to any of the 3 credit agency’s not even my monthly payments so trans union or any other agency does not include information and my credit is not good. I can however proof I have been paying via allied morgage has provided me with a annual spread sheet of my insurance and property tax and house payment and I did go through a escrow company when I purchased I also own another home my other home is free and clear it has been paid for ny me in cash in 2005 when I purchased. No liens on any properties at all. However my score is 530 yuk goes up a little each month pretty bad I know however I do have three credit cards trying to reastablish however max them want to pay off rip cards up not close accounts to build Up my reports it we’ll improve my score my advisor said but that would happen after the refi so won’t help me now unfortunately I do look like scum bottom of the fish pond. Getting no reporting on the buy in Picture Rocks and now this house. I have bought prior to these two homes many houses I purchased and sold paid off and made good money on them.I have all the paper work on my prior homes that I sold and then purchased another. I am property some what rich in it but cash poor and I need to pay off my not so big debt and build my borrowing power not to barrow money but to get score up. My house has gone up very fast I have done a brand new kitchen before it had sink and 2 cabinets so It’s only a matter of time probly two years and I well again sell and buy in this market or go to a great buyers market for purchase I sold my home I had built in California two months before market blew up in 2005 I had a gut feeling my instinct was sale now and leave Ca. after I bought builders home and lot eighteen months later I sold for 320,000 I only paid 140,000 my best investment yet. Prior to becoming disabled I made 110,000 a year selling radio advertising I was at that job over 7 years and sold for them radio advertising for there 6 radio stations I was there top biller for six of the seven years I loved it but got sick became perm disabled and collect social security disability which is a pretty decent amount and since no Doctor well release me back to work and I did work 30 years full time so my income is my social security and my 2 rentals have a additional single studio attached to this house and have tenant always also I have roommate has been with me since I purchased property he pays me rent and 1/2 utilitys I also am still getting child support monthly for many years to come and have my own business I started a year ago selling fashion at poshmark on line store so I bring in 48,200 a year on those my car is paid no debt. However I need some bills paid through the refi if you get me approved what I wish to do with part of the refinance Money don’t forget I also own another property on 1 acre with manufactured home with attached in law unit title is free and clear in my name I rent it out for 850.00 should be rented for 1,100 a month. I need about 1,000 to pay past property taxes on that place it’s late it’s about a year and a half on taxes that home is in picture rocks Az. Is fully insured always has been. I need to replace trim over the siding we replaced the trim last year and some skirting tenants dogs damaged the skirting we purchased and paid a lot for trim at Home Depot they advised us on product and it failed greatly trim has warped on windows across top,bottom tenants failed to tell us and it’s now been over a year no warranty on it after a year. I also need to do termite inspection and any treatment it may need also drain septic. so about 5,000. Also the house where I live and want to refinanced I need about a 120 ft of cyclone fencing or block wall I live next to ally walking ally no driving and also need two security doors installed on back entries and front door we have had some creepy guys checking out are yard and ales me uncomfortable now a bike stolen was stolen probly 3,000 And about 750.00 so my husband can get my mercedes completed it’s for parts only he does the work my credit cards and a personal loan credit cards are 1,200 personal loan 1,300. So what do you think I am looking for refi to pay about 11,000 in above debt nd get my interest at a normal rate. I do need creative honest financing without handing me several points and a bunch of charges a fair honest amount is all I ask then we can do business. I heard your a good company and I know you have to make money two but I am not one to not check out in detail what ever I am paying for but I am a nice respectful lady certainly do not want to be gouched on fees or points.
    I like to work with experienced person who can get this done or suggest another way. I do have equity in this home and my other home is worth 140,00 or more per Zillow. This home I live at is worth 135,000;to 150,000 per Zillow I am the only 4 bedroom 3 full baths in this area. So I prefer emailing but we’ll talk anytime to get this going I well provide you with anything needed promptly and properly so thank you.in advance for considering my business. I am very loyal to my brokers I looking for a long term relationship not a rich client but I do refer people a lot that help me.

    1. Hi Lisa:

      Unfortunately, we can’t help you until you get your median FICO score up to at least 580. That being said, we may be able to help you come up with a plan or at least some decent tips to get there. For starters, it doesn’t sound right to me that any reputable mortgage company wouldn’t report your payment history and credit. I’m going to suggest you talk to one of our Home Loan Experts at (888) 980-6716 and go from there. Thanks!

  3. Hi Kevin, I have a loan with Quicken Loans, I am interested in getting a HARP refinance on my loan and get cash out to pay my Credit card bills off. I will call tomorrow and talk to someone about this. Quicken Loans have been great to work with, hope I can get help with this. Thankyou Mrs. Allen

    1. Hi Mrs. Allen:

      That’s definitely a good goal to have. HARP has some fairly specific requirements, but even if you don’t qualify for that particular loan option, I feel quite confident we can work with you to find a scenario that meets your needs. You said you want to call today, so if you reach out to (888) 980-6716, that’ll get you in touch with a licensed home loan expert in your area. I’m very glad you’ve had a positive experience with us. It makes the work we do it every day worth it when we hear these kind words.

      Thanks,
      Kevin Graham

    1. It depends on what you’re trying to accomplish. If you just looking to rewrite or change your term, we can help you with a score is low as 580. If you want to take cash out, you need at least 620. Higher credit scores mean better terms. If you want to go over your options, you can get started online through Rocket Mortgage or call one of our Home Loan Experts at (888) 980-6716.

      Thanks,
      Kevin Graham

  4. I am currently interested in a Rocket Mortgage as I would choose no other lender. A couple of years ago I refinanced my home through Quicken Loans. I would be impossible to find a more efficient lender. Not only were they fast but kept me up-to-date on a weekly basis, if not more often, with the status of my loan. I was really amazed by the efficiency, professionalism and accuracy in which my loan was processed. I will always use Quicken Loans for any/all of my home financing needs. They are simply wonderful!!!

  5. I have a mortgage with you and I like to take out a home equity line for 40 g how do I go about that applying

    1. Hi Craig:

      Thanks for being an amazing client! At this time, we don’t do home equity lines. That said, we can do a cash-out refinance and accomplish the goal of helping you pay off debt. If you’d like to get started online, you can get a full refinance approval online through Rocket Mortgage. Otherwise, if you’d prefer to get started over the phone, you can give us a call at (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

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