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You pay your mortgage each month and you also may have a bunch of bills to pay as well. It may be easier to manage if you can consolidate all that outstanding debt into one payment or loan? Consolidating your debt with a cash-out refinance may allow you to do that. Here are some reasons why it may make sense to consolidate your debt thru a cash-out refinance and what you should consider before you make that decision.

What is debt consolidation? Should you refinance to pay off debt?

Debt consolidation allows you to take out a loan to pay off outstanding debts such as credit cards. Using loans or using a cash-out refinance to consolidate debt provides you with one single payment for your debt, so you can avoid missed payments and get a more favorable interest rate. 

How to use home equity to pay off debt

You can use the equity in your home to refinance your home and get cash to pay down your debt. This is called a cash out refinance. You refinance your mortgage for more than you owe and use that extra money to pay off your debt. This allows you to roll high-interest debt into your mortgage. Before you use a cash out refinance to pay off debt, you will need to know how much equity you have. To determine this, you’ll need to figure out your loan-to-value ratio, which is the difference between the amount your home is worth and how much you owe.

What are the benefits of a debt consolidation mortgage refinance?

Using a cash out refinance for consolidation to pay off your debt has a number of benefits:

  • You can consolidate high interest debt into a payment with a lower interest rate. Typically mortgage interest rates are much lower than credit card rates, so consolidating debt thru a cash-out refinance may allow you to pay less interest on your overall debt.
  • Your debt is consolidated into a single payment. Using your equity to help consolidate your debt allows you to roll all that debt into one single payment to give you fewer payments to manage and potentially help you avoid late payments.
  • It could improve your credit score.
  • The interest paid on your new loan may be tax deductible. However, you should consult your tax advisor for more details.

Is refinancing your house to pay off debt a good idea?

Be strategic when deciding if you should refinance your home for debt consolidation. When you choose to use your home’s equity to pay off debt with a cash out refinance, you are increasing your loan amount, which may also raise your monthly mortgage payment. The amount of the increase would depend on the amount of the loan and interest rate you qualify for.

You may also increase the term of your loan. For example, if you’ve already paid 10 years into your 30 year loan, you will only have 20 years left, but you may only be able to afford the consolidated mortgage payment if you go back to a 30 year loan. This would also increase the amount of interest you will pay throughout the life of the loan, so it’s important to do the math to ensure a cash out refinance for debt consolidation makes financial sense. Take into consideration how long you plan on staying in your home. It may not make sense to add more cost to your mortgage if you’re planning on selling soon.

Before you decide on a cash out refinance for debt consolidation, you need to ensure:

  • Your total debt after the refinance and debt consolidation isn’t more than 50% of your income. Do the math to ensure you do not add too much to your mortgage that you can’t afford.
  • You have at least a fair credit score to get approval for the cash out refinance.
  • You can afford the new monthly mortgage payment.

Refinancing your mortgage to consolidate your debt can be a good option to help manage expenses. Contact a Freedom Mortgage loan advisor at 877-220-5533 to help you decide whether a cash out refinance is the right move for you to consolidate your debt.

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