Can You Add Credit Card Debt Into a New Mortgage?

High-interest credit card debt presents a significant financial challenge for many individuals and households. The burden of multiple monthly payments and escalating interest charges can feel overwhelming, prompting homeowners to explore options for relief. Leveraging the equity built in a home through a mortgage can offer a pathway to manage this debt, potentially by securing a lower interest rate and simplifying repayment into a single obligation. This approach may provide a more structured financial outlook for those seeking to reduce their overall debt load.

Methods for Consolidating Credit Card Debt

Homeowners seeking to consolidate credit card debt into their mortgage have several mechanisms. A cash-out refinance replaces an existing mortgage with a new, larger loan. The difference is disbursed in cash at closing to pay off credit card balances. This results in one consolidated mortgage payment.

Another option is a Home Equity Line of Credit (HELOC). This functions as a revolving line of credit secured by home equity. Borrowers can draw funds as needed during a draw period, around 10 years, paying interest only on the amount borrowed. After this, a repayment period begins, up to 20 years, requiring principal and interest payments. HELOCs often feature variable interest rates and can fluctuate with market conditions, though fixed-rate options exist.

Alternatively, a Home Equity Loan, a second mortgage, provides a lump sum upfront. This loan is separate from the primary mortgage and comes with a fixed interest rate and predictable monthly payments that begin immediately. The homeowner receives the entire loan amount at once to pay off high-interest credit card debt. Each method replaces multiple high-interest debts with a single payment, but their structures for accessing and repaying funds differ.

Eligibility Requirements

Lenders evaluate several factors for mortgage-based debt consolidation eligibility. Home equity is a primary consideration. Borrowers must possess sufficient equity, the difference between market value and outstanding mortgage balance. Lenders typically require a Loan-to-Value (LTV) ratio of 80% to 85%, lending up to 80% or 85% of the appraised value, requiring 15% to 20% equity retention after the new loan.

A strong credit score is also an important qualification, indicating a history of managing financial obligations. While minimum scores vary by lender and loan type, 620 is often a baseline for conventional cash-out refinances and home equity loans. For HELOCs, lenders may prefer a higher score, around 680 to 720, for more favorable terms.

Lenders also assess a borrower’s Debt-to-Income (DTI) ratio, comparing total monthly debt payments to gross monthly income. A lower DTI indicates greater ability to manage additional debt. Most lenders prefer a DTI no higher than 36% to 43% for mortgage approval, though some programs allow up to 50%. Existing credit card debt and the proposed new mortgage payment contribute to this ratio.

Stable employment and income history are essential for consistent repayment capacity. Borrowers need at least two years of stable income and employment, verified through tax returns, W-2s, and pay stubs. Job changes are viewed more favorably if within the same field and resulting in consistent or increased income. The property must also meet appraisal standards to serve as suitable collateral.

Financial Considerations

Consolidating credit card debt into a mortgage requires understanding financial implications beyond a lower interest rate. Total interest paid over the loan’s lifetime is a significant factor. While mortgage rates are lower than credit card rates, extending a debt (e.g., 3-5 years for credit cards) over a 15- to 30-year mortgage term can lead to substantially more total interest paid. For example, a $10,000 credit card balance paid in three years might incur $1,500 in interest, but if rolled into a 30-year mortgage, total interest could be several times higher.

Borrowers must also account for closing costs. These fees typically range from 2% to 5% of the new loan amount, sometimes reaching 6%. Common closing costs include loan origination fees (0-1% of loan amount), appraisal fees ($500-$1,000), title insurance, processing fees, underwriting fees, and recording fees. These upfront costs reduce net cash received and add to the overall expense.

The home becomes collateral for the consolidated debt. If a borrower defaults on the mortgage, the home could be subject to foreclosure, leading to property loss. This elevates unsecured credit card debt to secured debt, placing the primary asset at risk. Taking on a larger mortgage payment may also reduce future financial flexibility, limiting funds for emergencies, investments, or other financial goals.

The risk of re-accumulating credit card debt also exists after consolidation. If spending habits are not addressed, borrowers might find new credit card balances in addition to a larger mortgage. This can worsen financial strain, creating a cycle of debt. While mortgage interest may be tax-deductible, this applies only to interest on debt used to buy, build, or substantially improve the home. For mortgages originated after December 15, 2017, the deduction is limited to interest on up to $750,000 of qualified mortgage debt ($375,000 for married filing separately). Borrowers should consult a tax professional for specific tax implications.