Use Your Home for Debt Consolidation

Have you cried, "Charge," one too many times at the checkout counter? If you find yourself in too much debt, it's time to call in the cavalry-a home mortgage debt consolidation loan. Debt consolidation can drastically reduce your monthly expenditures, sometimes saving $100 to $500 a month. It's a simple: take your various credit card and loan balances and consolidate them into one mortgage.

There are two types of loans that are ideal for debt consolidation: A refinance of your first mortgage, or a home equity loan. Both are tax deductible and offer relatively low interest rates.

Mortgage refinancing

A refinance of your first mortgage involves rewriting your current loan and pulling out equity from your house to pay off your existing debts. While this won't eliminate your debt, it will move it to a loan with significantly lower rate than you would pay using a credit card. There are two possible negatives to watch out for, however. First, you'll be spreading your loan payments out over the length of the new loan term, usually 15 to 30 years. But, if you're struggling with cash flow, it might be a good short-term move.

The second potential pitfall is closing costs, which can be as high as 4 to 5 percent of your mortgage. However, you may be able to roll them into the amount of your new loan and incur no out-of-pocket expenses up front.

Second mortgage

Another alternative-especially if you have a first mortgage at a low interest rate-is to take out a second mortgage. This can come in the form of a fixed-rate home equity loan, or a home equity line of credit (HELOC). The home equity loan is set in stone in terms of payment and term. The HELOC, on the other hand, works like a credit card-you're extended a line of credit based on the equity in your home

The second mortgage option will consolidate your debt, much like a mortgage refinance, but its rate tends to be a little higher than that of a first mortgage. However, if you already have a great first mortgage rate, this can be a terrific option. Because the length of repayment on the second mortgage tends to be shorter, you would also avoid higher long-term interest payments.

Take a careful look at all your mortgage options when it comes to consolidation. No matter which one you choose, a home loan can save the day. It's nice to know that, when it comes time to do battle with credit card debt, your home can be the cavalry.