According to daveramsey.com, 80% of Americans have at least some type of personal debt. Debts can range from student loans, car loans, credit card payments to personal unsecured loans. Managing debt can feel like a never-ending cycle of always trying to reach financial stability while constantly accumulating interest on your loans. Ensuring you create a plan to help pay off those debts is the best way to manage your money. Many people don’t realize that refinancing your mortgage loan is a great way to help consolidate and pay off your debt. Mortgage loans typically have lower interest rates than student loans, credit cards, and other loans. Refinancing with cash out allows you to access your home’s equity to pay off higher-interest debt. With interest rates incredibly low right now, in most cases, even by increasing your mortgage loan amount to pay off debt, your total monthly obligation goes down.
When you do a cash-out refinance, you pay off your original mortgage loan with a new mortgage that includes the amount of debt you want to pay off. It is a higher loan amount, but it is usually at a lower interest rate. For a cash-out refinance to work, your appraised home value must be high enough to tap into your home’s equity. A cash-out refinance requires you to go through the full mortgage process, submit an application, choose the right loan program, hand in your financial documents, and then have a closing when your application is approved.
Your lender will calculate your home’s equity through various factors. They will look at your debt to income ratio, which shows how much income is left over after your monthly bills are paid. They will also look at your mortgage amount compared to your home’s current appraised value, which is your loan to value ratio. Like every mortgage application, other financial documents will be reviewed, such as your credit score, W2’s, and pay stubs. With this analysis, the maximum amount you can finance can be determined.
Loan Scenario Example:
Say you had a home loan for $150,000 and the interest rate was 3% and credit card debt that was $15,000 with an interest rate of 18%. If you refinance your home loan to include that $15,000 in debt, you now have a new home loan for $165,000 but at say the same rate of 3%. This allows you to pay off your higher-interest credit card debt and adds that debt to your home loan, which is at a much lower rate. You will save much more money by not letting your credit card debt pile up. Refinancing to pay off your debt allows you to reallocate your debts into one loan with a significantly lower interest rate.
To run a loan scenario, you can also use our mortgage calculator. Mortgage Calculator!
Disclaimer: The above scenario is for example purposes only. APR and Rates are subject to change without notice. APR means annual percentage rate. This is not an offer of credit or commitment to lend.
Mortgage rates are at record lows right now, so refinancing could help you save money. Also, consolidating your high-interest debts into your new low-interest home loan is a great way to pay off your pre-existing debts.
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