Get a Mortgage to Pay Off Your Debts

House prices historically rise over time, which is one of the reasons most people dream of owing a home. Unfortunately when you own a home you are also responsible for the repairs and maintenance, and paying for the furniture to go into your home, so it's not uncommon for home owners to also have a lot of debt.

If you have high payments on your mortgage and other debts each month it's called being "house rich and cash poor", because all of your wealth is tied up in your house, and you have no cash at the end of the month.

However, for cash strapped homeowners there is hope. If your home has increased in value, you might be able to use a mortgage to repay some of your debts. Because mortgages are traditionally the least expensive form of borrowing (because the loan is secured by your house), you might be able to borrow at a low interest rate to repay your higher interest rate credit card and other debts.

How can I get a mortgage to pay off my other debts?

Here's the process:

First, find out what your house is worth. Contact the real estate agent who you used to buy the house, or find a real estate agent that is active in your area. Ask them to give you an opinion of value on your house. You don't need a full appraisal. You just want an idea of what your house would sell for today. Most real estate agents will do this for free, because they want to sell your house when you decide to move.

Second, call your mortgage lender and find out how much is still owing on your mortgage.

Third, calculate the equity in your house. Your equity is the difference between what your home would sell for (after real estate commissions, legal fees, outstanding property taxes and any penalties to break your mortgage) and the amount owing on your mortgage. It's the amount you would get if you sold your house.

Fourth, review your personal budget to determine how much you could afford to pay if you increased your mortgage. Of course if you got a mortgage you would use the mortgage to repay your other debts, so those payments would disappear.

Fifth, talk to your bank or mortgage broker about a new mortgage. You could get a brand new, higher mortgage and repay your current mortgage. You could also get a second mortgage, so now you have two mortgages on your house. The final option is to get a secured line of credit, which is a mortgage but you can pay it off whenever you want.

(Read our articles on Getting a Mortgage to Pay off your Debts and on Three ways to borrow against your house as a bankruptcy alternative).

Once you know what you can borrow, and whether or not the bank will lend you the money, you can decide if a second mortgage or a refinancing is the correct bankruptcy alternative for you.