I had a client call the other day looking for information on a debt consolidation mortgage loan. They had a number of consumer debts the woman caller told me. She was pregnant and concerned about being able to afford all their payments on just her husband's income. She really wanted the option to be a stay-at-home mom without feeling compelled to return to work after the baby was born; could I help them reduce their monthly payments?
To find out if I could help, I had some questions for her; Shawna was her name...
The first question I asked Shawna was: do you already own a house (because a debt consolidation mortgage requires a house!)
The second question I asked was: how much is the house worth?
The third question I asked was: what do you currently owe on your mortgage?
The final questions was: what consumer debts do you want to get rid of?
The key point in consolidating debts into a mortgage is to understand that there needs to be enough home equity, which is the difference between what the house is worth and what the mortgage balance is at currently. "Enough home equity" means equity over and above the equity the bank requires you to retain in the property. Any surplus equity can then be accessed to consolidate and pay off the other debt balances, which makes those payments go away.
Here's an example on how to calculate your available home equity: If your house is worth $300K and you owe on your mortgage $200K, then there is $100K in equity. BUT, let's say the lender rules state that you must keep 20% equity (typical) in the property, which is $60K. In this case, there would be $40K in available home equity ($100K-$60K) that you could access.
Shawna did some digging and got back to me with the following information:
Here are their debts in table format. Note, the total balance owing is $210K and the total of all payments is $2,271 per month, too high for this family.
LOANS BEFORE | -BALANCE | -PAYMENT/MO |
Mortgage | $162,000 | $960 |
Vehicle | $ 23,000 | $561 |
Credit Cards | $ 9,000 | $270 |
Line of Credit | $ 16,000 | $480 |
TOTAL | $210,000 | $2,271 |
In Shawna and her husband's case, they had total home equity of $138K ($300K value less $162K owed) and the new mortgage lender would require them to retain $60K equity in the property, so they had over $78K of available home equity, much more than the $48K required - looking good!
Here's what I proposed: arrange a new mortgage for $210K re-amortized over 25 years at a great low interest rate. When the money comes in, their lawyer would be instructed to pay off the old mortgage and all the debts, leaving them with just one manageable new consolidated mortgage payment of $885/mo (that's $1386/mo less than the $2271/mo they were paying before!)
LOANS AFTER | -BALANCE | -PAYMENT/MO |
Mortgage | $210,000 | $885 |
Vehicle | (paid off) | - |
Credit Cards | (paid off) | - |
Line of Credit | (paid off) | - |
TOTAL | $210,000 | $885 |
Also for more information check out Borrowing on Home Equity.