I’m drowning in $70K of credit card debt — should I consolidate that bad debt into my mortgage?

Credit card debts are unsecured — mortgage debt isn't

When you use a mortgage to consolidate credit card debt, you are converting unsecured debt to secured debt, and there are risks involved with doing that.

With unsecured debt, creditors have only your promise you'll pay. Technically, a credit card company could sue you, have a lien put on your house or your wages garnished. However, this is unlikely to happen, as it requires a lot of time and effort. Even if it did, you typically wouldn’t lose your house, and you could get your credit card discharged in bankruptcy.

With secured debt, on the other hand, your house acts as collateral guaranteeing the loan. All of a sudden, your home is on the line. If you don't pay, you'll end up in foreclosure. You can't just wipe out the debt in bankruptcy, either, since your creditors now have a claim on your house.

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Mortgage rates aren't very competitive right now

Consolidating credit card debt into a mortgage was more attractive when mortgage rates were around 3% to 4%. Unfortunately, that’s no longer the case.

To access your equity to pay off your credit cards, you'll have to apply for either a cash-out refinance loan or a home equity loan. If you have a low mortgage rate, you don't want a cash-out refinance since that involves taking out a new loan to pay off your cards and giving up your existing low rate.

A home equity loan is a better alternative, but still not a great one. As of August 2024, home equity loan rates are averaging around 8.5%. While this is surely lower than your credit card's interest rate, it's not that much better than the 11.92% average rate the Federal Reserve says personal loans are offering now.

Once you factor in the increased risks, and additional costs associated with a home equity loan, such as an appraisal, it might make more sense to consolidate with a personal loan instead.

You could risk ending up underwater on your home

Still not convinced you should leave your equity alone? You also face the huge risk of ending up "underwater" on your house if you pull equity out of it. In other words, owing more than you could sell for.

If you are underwater and have to sell for some reason, you could be stuck unless you can bring enough cash to the table to pay off the entire loan balance. Most people can't do that. You also can't refinance an underwater loan since banks won't lend more than your house is worth.

You don't want to be trapped in your home, unable to refinance, and at risk of losing your house if something goes wrong.

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Consider alternatives before accessing your home equity

Raiding the equity in your home to deal with credit card debt might not be worth the downsides. Before you proceed, consider a personal loan or reach out to your creditors to see if they'll work with you to lower your rate or create a repayment plan.

Either of these options can make debt payoff easier without putting one of your most valuable assets at risk.