When you have equity in your home, refinancing might help you get cash to consolidate debts and save money on interest. Here’s what you need to know about cash out refinancing and debt consolidation.
What is debt consolidation?
When you consolidate debt, you use money from a new loan to pay off debts from other sources like credit cards and medical bills. Consolidating lets you make one payment to one lender, which makes bills easier to manage.
Is debt consolidation a good idea?
Consolidation can be a good idea when the interest rate on your new loan is significantly lower than the rate on your current debts. One goal of debt consolidation is to reduce how much money you pay in higher interest loans over time.
For example, credit card debt usually has higher interest rates than home mortgages. It might make sense to use a cash out mortgage refinance to pay off credit card debt because you could lower the amount you pay in interest. Be sure you understand the cost of refinancing and if you can afford the new mortgage payment.
Does debt consolidation reduce the amount of money you owe?
No, consolidation does not reduce the amount of money you owe. Only paying down principal can reduce how much you owe.
Consolidation simplifies bill paying and might save you money on interest. It might also lower the amount you pay each month. A cash out refinance adds debt to your mortgage. Because mortgage payments can be spread over 30 years, your total monthly debt payments may be lower. However, refinancing may increase the total amount of interest you pay over the life of your loan.
Financial professionals note a risk of debt consolidation is it can give you access to new credit, which gives you the ability to borrow more money and increase the amount you owe. Use consolidation as part of a responsible plan to manage your finances.
What is a cash out refinance?
A cash out refinance replaces your current mortgage with a new mortgage for a higher amount and gives you the difference in cash at closing. The interest rate and term will likely be different on your new mortgage. And the amount you owe will increase since you are rolling additional debt into your mortgage balance.
You can also get a home equity loan or a home equity line of credit (or “HELOC”) to pay down debt. Learn more about these different home equity loan options.
What are the requirements for a cash out refinance?
You need available equity in your home to get a cash out refinance. You can estimate your equity by taking the current value of your home and subtracting how much you owe on your mortgage and other home loans. If your house is worth $250,000 and you owe $150,000 on a mortgage for example, you have $100,000 in equity. Lenders might let you borrow a portion of this equity to consolidate debts.
You will be required to complete a mortgage application, provide financial documents, and pay closing costs to get a cash out refinance. Look at all the interest costs and fees before deciding a refinance is right for you.
* Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions and consult a tax advisor regarding tax implications and the deductibility of mortgage interest.