Credit card debt is on the move, motivated in part by the economy, and credit lines have provided a temporary solution, but usually at a high cost.

For some people, one way to eliminate the high cost of credit cards is a debt consolidation loan, which combines multiple high interest debts into one lower payment. Sounds easy enough, but you have to be a homeowner, and you need to have equity and good credit.

A debt consolidation loan is another name for a cash out refinance or a home equity loan. Unsecured credit cards, or other debts, are paid off using the equity in your home. A low fixed rate home loan reduces the monthly payment, and because a debt consolidation loan is fully amortized, the debt is gone at the end of the term. Converting debts to a home loan could also save money from tax deductible interest.

Another benefit of a debt consolidation loan is the elimination of daily compounded interest on credit cards. More interest charges accumulate on a compounded interest loan as opposed to a simple interest loan. Paying interest on the interest charges could be the end result if only the minimum payments are made.

Consider an example: An average rate of 15% on credit cards with a combined balance of $40,000 could have a monthly payment of about $560, over a 15 year term. A debt consolidation loan with the same balance at 8% could have a payment of about $382 over the same term. A lower rate would of course result in more savings. Also, the loan could be paid off in about half the time by applying the monthly savings to the payments.

When a debt consolidation loan is a refinance, it should be noted that some lenders have an underwriting guideline called seasoning. Cash out can be limited under this guideline based on when home equity was taken out. Restrictions may apply if there was a cash out refinance done within the last 6 months to 1 year. Usually, this guideline applies if the new loan is over 75% of value. FHA loans offer more flexibility, with cash out up to 95% loan to value.