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How Using Mortgage Loans Can Help You Get Out Of Debt

Angela Mae Updated: June 26, 2023 • 5 min read

If you’re struggling with high-interest debts, such as personal loans or credit cards, it may be time to consolidate them. Debt consolidation with mortgage refinance could lower your monthly payments and help you get a better handle on what you owe. Using a mortgage refinance or a home loan for debt consolidation is relevant for many. You’ll need to meet certain credit score, home equity, and debt-to-income ratio (DTI) requirements to be eligible. Some mortgage lenders may have additional requirements as well.

Consolidate Your Debt into a Mortgage

Consolidate Your Debt Into a Mortgage

Here are the pros and cons of mortgage loans & debt consolidation:


  • Combining debts into a home loan could result in a lower interest rate than the original high-interest debts.
  • Having only one loan with a single monthly payment can make it easier to stay on top of payments.
  • Debt consolidation often results in a lower monthly payment, which can free up cash for other debts or bills.
  • Some lenders let you use up to 80% or 90% of the home equity in debt consolidation.
  • The funds from debt consolidation into a mortgage may be available within 3 to 5 business days.


  • Although debt consolidation with mortgage refinance may lower the interest rate, it can reset or extend the life of the loan.
  • Debt consolidation with a mortgage refinance requires you to pay closing costs. This can cut into the amount you have available for consolidation.
  • Most lenders only work with borrowers with at least 20% equity in their home and a maximum DTI of 43%.
  • If you refinance your home to consolidate debt and the equity drops to less than 20%, you may have to pay private mortgage insurance (PMI).
  • Conventional mortgage loans usually require a 620+ FICO credit score, though FHA loans may require a lower credit score.
  • Consolidating unsecured debts into a home loan means using the property as collateral. If you default on payments, you could lose the home.
  • Relying on home equity to consolidate debt could trap you in a cycle of debt if you’re not careful.

Can I Consolidate my Debt Before Applying For a Mortgage?

Approving a mortgage is calculated based on risks. The lender may be much more likely to lend to you after resolving your debts. Once all your accounts are paid off, and all your payments are made on time, you can then borrow and spend responsibly. Lenders may consider you for a mortgage if you have a healthy credit score over the long term.

You should not be affected by the consolidation of debt before you apply for a mortgage. There is even a possibility that it might improve your chances of acceptance.

Although debt consolidation has a reputation for being risky, there is no reason for a lender to view this loan negatively. Consolidating your debt shouldn't affect your eligibility for a mortgage as long as you meet your repayments on time.

The Problem of Having Multiple Loans vs. One Mortgage

Having multiple loans or keeping a balance on more than one high-interest credit card debt can lead to financial and credit issues. For example:

  • Keeping up with payments can be hard. The more monthly payments you have to track, the easier it is to miss one. This is especially true when there are several accounts with different due dates. Missed or late payments often mean late fees and can hurt your credit.
  • Your DTI can increase. DTI is the percentage of total monthly debt you have compared to your gross (pre-taxed) monthly income. A low DTI shows prospective lenders that you can manage your finances. Most lenders only work with people with a maximum DTI of 43%, including their mortgage payment. To determine your DTI, add up your monthly debts and divide them by your pre-taxed monthly income.
  • It can take longer to pay down debt. The more loans you have, the harder it can be to pay them off. This is often the case when the loans have high-interest rates, and you can only make the minimum monthly payments.

Done right, consolidating with a home loan can make it easier to repay high-interest debts and decrease the monthly payment. It can also lower the risk of defaulting on the loan or missing payments. Plus, if you pay more than the minimum, it could reduce your DTI and help improve your credit score.

How to Choose Whether or Not You Should Consider Consolidating Your Debts Into Your Home Loan

Here are some reasons why you might want to use a home loan to consolidate debt:

  • You have difficulty keeping up with multiple monthly payments or are frequently late.
  • Your credit score is tanking because of high DTI or missed or late payments.
  • The balances on the other loans or credit cards aren’t going down, or it’s taking a long time to see any noticeable difference.
  • You’ve built up enough home equity to consolidate all the necessary debts.
  • Debt consolidation into a mortgage would let you pay more than the minimum to pay down debt faster.
  • The new monthly payment and interest rate would be lower than the individual debts.

On the other hand, you may not want to consolidate debts into a home loan if:

  • You’re keeping up with several different monthly loans or credit card payments without a problem.
  • The current interest rates are manageable or would not decrease through debt consolidation.
  • The closing costs would be higher than they’re worth.
  • There’s insufficient home equity to consolidate multiple debts.
  • You’re already paying more than the monthly minimums on each account and keeping the DTI low.

For first-time homeowners, you may be wondering: can you consolidate debt into a first-time mortgage? It’s typically possible if there’s enough equity in the home and you meet any lender-specific requirements.

Also, if consolidating debt results in a lower DTI, you may be eligible for a larger mortgage later. This can be helpful for those interested in purchasing a new or second home.

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Consolidating with a home loan could mean a lower monthly payment, more available cash each month, and a lower DTI. It could also make it easier to start tackling your debts.

It does come with some drawbacks, though. For example, the amount of home equity needs to be high enough to cover all or most of the debts you want to consolidate. Even if you have high-interest credit card debt or loans, weigh your options before using a home loan for debt consolidation.

Also, consider the types of mortgage loans and refinancing options, your monthly cash flow and budget, and any eligibility requirements. To get the most out of debt consolidation, make a long-term plan to pay off your debts and improve your financial and credit health.

Written by Angela Mae

Angela Mae is a personal finance writer specializing in loans, debt management, investing, retirement planning, and financial literacy. She comes from a journalistic background and pulls from hands-on experience and deep-dive research to breathe life into her stories. Her goal is to help others achieve financial stability and independence. When not writing, she can be found traveling, honing her yoga skills, hiking, or exploring new means of healthy, sustainable living.