Refinance for Debt Consolidation
Mortgage refinancing can be a great way to consolidate debt. A debt consolidation refinance is similar to a cash-out refinance where the cash goes toward consolidating debt.
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How does it work?
Refinancing for debt consolidation works like a cash-out refinance. You refinance a new mortgage and borrower more than what you owe. The cash from this loan is used to pay off debt instead of being stashed into your bank account.
Most lenders only allow borrowing up to 80% of your home value.
When should you refinance your mortgage for debt consolidation?
If you have a high amount of high interest debt, and if mortgage rates are lower than your current mortgage rate, consolidating that debt with a mortgage refinance could be a wise financial move.
Mortgage refinance for debt consolidation
USE THIS EXAMPLE TO RUN THE NUMBERS
Assume your home is worth $600,000 and you have a current mortgage balance of $300,000. Your current mortgage rate is 5%, and for the sake of this example we’ll assume the refinance also be at a 5% rate.
You have $50,000 in debt at an average combined interest rate of 16%
Refinancing for debt consolidation would require a new mortgage that would raise your mortgage balance to $350,000, and
Current mortgage + Interest Payment
Current combined debt payments
Mortgage + current debt
New mortgage + Interest Payment
Monthly savings after refinance
What are reasons to consider a mortgage refinance?it's your equity, use it when you need it
Mortgage refinancing can make a lot of sense for a lot of different reasons. your reason for refinancing will play a large role in what kind of refinance option works best. Below are some of the more common reasons someone may decide to refinance their mortgage.
Refinancing your mortgage can be an excellent way to consolidate debt. Leverage your home equity to help improve your finances.
Simplify your lifesave money & Consolidate your debt
Multiple different payments at different dates, paying down debt with different rates can be a lot to manage. Consolidating your high interest debt with a lower rate can save you money while simplifying your life with one easy payment.
Have questions about refinancing for debt consolidation?We've put together some answers to commonly asked questions about refinancing for debt consolidation
1 Should I refinance for debt consolidation?
The answer depends on your financial situation. If you have a high amount of debt with a high average interest rate, consolidating your debt with a refinance could make sense.
Traditionally mortgage rates are much lower than other rates, like credit cards, so consolidating other debt with higher rates can save borrowers a lot of money on interest.
However, refinancing your home means taking on a new mortgage loan. If your current rate is lower than your new rate would be, it could be better to just pay the debt as best you can to save on interest over the life of your mortgage loan if it would be higher.
It's always best to speak with a professional before making such important financial decisions, and understand all of your options.
2 Will debt consolidation hurt my credit score?
Debt consolidation should improve your credit score long-term, assuming that you practice responsible financial habits following the debt consolidation.
Some borrowers can see their credit score drop directly following a debt consolidation, but maintaining a low debt to credit ratio and having available credit balances while showing consistent on-time payments does a lot to improve your credit score over time.
If a borrower were to take out a debt consolidation loan, pay down credit cards, and then run them up again, it can result in a lower credit score overall.
3 What's the best way to consolidate debt?
The best way to consolidate debt is whichever method that allows you to save money on interest and fits your goals and financial situation.
Often times borrowers can maintain a level of debt across different accounts, and if the average interest on this debt is higher than it would be with a consolidation loan, borrowers should consider consolidation.
Personal loans are unsecured, and offer debt consolidation loans that don't require collateral. The rates on personal loans are normally higher than the options offered by home equity.
Balance transfers to other cards is an option as well. If you intended to pay down the debt within 1 years or so, it could be worth looking into credit cards that offer balance transfers and have promotional offers that give you the opportunity to not pay interest for the first 6-18 months.
Utilizing home equity can usually get you lower rates than personal loans and most credit cards. A home equity loan, or a home equity line of credit (HELOC) can be an option as well. A HELOC or HELOAN could make sense for you if refinancing would come with a mortgage at a higher interest rate.
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