When you’re a homeowner, there are often many expenses you have to pay for. As a result, you have to deal with many types of debt, including your mortgage, student loans, auto loans, credit cards or more. For some, these financial responsibilities can make managing your finances quite a challenge. The good news? You can use the financial power you’ve accumulated in your home to make managing your finances much easier!
Doing a cash-out refinance doesn’t reduce the amount of debt you owe, but it can give you cash on hand to pay down that debt, help you save on interest and perhaps lower your monthly payments. Read on to learn more and see real examples of using a cash-out refinance to consolidate debt.
Did you know that interest rates on mortgages are typically much lower than those for credit cards? For example, in 2018 the U.S. average for a 30-year fixed rate mortgage was around 5%. But the average credit card interest rate for the same week was around 18%.
It may be easier for you to pay off your debt by paying a fixed amount over a period of time
For some homeowners, it doesn’t make sense to maintain balances on high-interest loans or credit cards when you have the opportunity to refinance your home. Because home mortgages carry a much lower interest rate than credit cards, it may be easier for you to pay off your debt by paying a fixed amount over a period of time. At Residential Home Funding, our loan officers can help you make sense of your personal and specific options while simultaneously organizing your finances.
You can see if you qualify quickly and easily by clicking here.
Unfortunately, debt is a major problem for many American households. It might seem as though there’s no relief from high-interest balances, but you can take smart financial steps to lower your burden. For homeowners, one of them is to consolidate that debt and lower your monthly bills by refinancing your greatest financial asset – your home.
Why would I want to pay more when I don’t have to?
There is often at least 10 percentage points separating the average 30-year mortgage rate from the average credit card interest rate. This is because credit card debt is perceived as much riskier than mortgage debt, and the credit card companies will charge interest accordingly. For example, if you have debt that costs you 15% and you move it to a loan that charges you only 5%, you can effectively give yourself almost a 10% return on your money. Makes sense, right? Ask yourself – why would I want to pay more when I don’t have to?
This debt consolidation is done via a cash-out refinance. This allows you to turn the equity you’ve built up in your home into cash that you can use for whatever you choose. A common choice for homeowners is to consolidate credit card debt using a cash-out refinance because they can make fixed payments on it over a set period of time versus paying a revolving balance each month.
Considering a cash-out refinance?
You’ll want to make sure you have enough equity in your home to take from, and that the cash you take out of your home won’t leave you with a loan-to-value (LTV) ratio that exceeds what is allowable. Typically, on Conventional financing, the maximum you can borrow is 80% of the value of your home, although in some instances you can go to 85%. Exceeding an 80% LTV ratio means that you’ll have to buy private mortgage insurance, which will add to your monthly payment but still may make sense when compared to the elevated interest rates of the credit cards you are paying off. Refinancing when you’re at an 80% LTV often means we can eliminate your mortgage insurance all together – another benefit of a cash out refinance!
Want to calculate your current LTV ratio? Here’s how:
Current Loan Balance: $140,000
Divided by
Current Appraised Value: $400,000
Equals
Answer x100: 0.35 x 100
LTV: 35%
Divide your current mortgage balance amount by the approximate current value of your home. Don’t know your current value? We can talk with you and find out the approximate value to help.
If you want to cash out your home equity to pay off high-interest credit card debt, add the amount of debt you’re paying off to the loan amount, like this:
Take the current mortgage balance that you have. Now add the credit card balance that you would like to pay off. This new total is divided by your home value – this number is your LTV (loan-to-value ratio)
For example, let’s say your current mortgage balance is $225,000 on a home that’s worth approximately $400,000, and you want to pay off $15,000 in credit card debt. Your calculation would look like this:
$225,000 + $15,000 = $240,000. You divide this number by $400,000 and that = 0.60 or 60%
Since your loan-to-value ratio is less than 80%, you’re able to refinance and cash out enough equity to pay off your credit card debt without having to pay for mortgage insurance! In this example, it’s a smart financial decision. Our licensed loan officers can review your personal finances at no cost and help you make the best decision that works for you.
Consolidate Debt by Refinancing Your Mortgage
It is probably not a prudent financial decision to maintain balances on high-interest loans or credit cards when you have the opportunity to refinance your home and consolidate your high-interest debt into one low monthly payment while paying less overall every month. Also, unlike credit card interest, the interest on your mortgage is usually tax deductible, but make sure to consult with your accountant to go over any questions.
Even if you don’t have perfect credit, we can help! We work closely with quick and reputable credit repair companies. Paying off your higher-interest debts faster can drastically improve your credit rating.
Want to find out if you could lower your monthly payment or take cash out to access money for your other bills? Click here now.
Are you interested in consolidating two mortgages? At Residential Home Funding, we can help you refinance both loans into one with a competitive rate that could significantly reduce your monthly mortgage payment. We’ve helped Americans for over 15 years lower their monthly payment by refinancing. Contact us today to see how we can help!
Why You Should Choose Residential Home Funding
At RHF, you’ll get a simple, quick and easy online application process with less paperwork. It allows you to log in at any time and track the status of your mortgage application.
Our Home Loan Experts are available to answer your questions day or night, and help you understand the details so you get the right personalized mortgage just for you.
Popular Loan Options for Consolidating Debt
FHA loan – Refinance your debt into one low-cost loan and you can go up to 85% LTV!
15-year fixed-rate loan – Consolidate your debt and pay it off sooner with a 15-year fixed-rate mortgage
30-year fixed-rate loan – Know your fixed monthly payment amount with a 30-year fixed
VA loan – Veterans and active military members can consolidate debt with a low fixed rate and can take cash out up to 100% of the value of the house!
Frequently Asked Questions
How much will it cost me to refinance?
In most instances, you are able to add the closing costs associated with getting a new mortgage into the total refinance amount to avoid paying anything out of pocket at closing. However, refinancing to get cash out or consolidate your debt may result in a longer loan term or a higher rate, and that might mean paying more in interest overall in the long run.
How often can I refinance my home?
Some states have limits on how soon or how often their residents can refinance a home loan. These limits are often designed to ensure that the refinance process benefits the homeowner. Additionally, you want to be sure you are getting expert advice from someone who can assess your financial situation and offer honest suggestions. At RHF, that personalized lending is what we do best.
Limits and regulations aside, it’s very important to make sure that refinancing helps you meet your financial goals.
If you are struggling to pay your bills and feel like you are overwhelmed by debt, you are not alone. There are millions of others in the same boat. For many people, a smart, personalized debt management consolidation program is the best answer for regaining control of their finances and building a solid foundation for the future.
Talk to an expert RHF licensed loan officer or use our refinance calculator to see if refinancing your home can help you consolidate your debt.
At Residential Home Funding, we can help you create a structured repayment plan that will put you on track to repay all of your unsecured debts and help you learn to make sound financial choices that will keep you worry-free. With this plan in place you can:
Consolidate debt payments into one convenient monthly payment
- Eliminate Fees
- Pay off your debt much faster
- Eliminate your Mortgage Insurance
- Lower your overall interest rates
- Stop collection calls
- One-on-One personal coaching and support
Qualifying for a Debt Consolidation Refinance
In order to qualify for a debt consolidation loan that will enable you to pay off your other debts, you must have enough equity in your home to be eligible to borrow that large sum. Some loan programs limit the amount you can borrow up to 85% of the home’s value (conventional and FHA), while others will allow up to 95% or more (VA). The current value of the property will be determined by an appraisal conducted by a licensed, third party appraiser. This can all be determined and explained to you by an RHF loan officer.
So, how much difference can a cash-out refinance make?
Below is an example of how much you can potentially save in monthly payments when you roll your credit card debt into a mortgage refinancing:
Before Refinance
| Mortgage | $200,000 with 30-year fixed APR at 5.500% | $1,136 per month |
| Credit cards | $30,000 at 15% (estimated) | |
| Total Monthly Payments | $1,436 | $300 per month |
After Refinance
| Mortgage | $230,000 with 30-year fixed APR at 4.500% | |
| Total Monthly Payments | $1,165 | |
| Monthly Savings: | $271 per month |
Deal with the root cause of your debt
Refinancing your mortgage to cover credit card debt is a quick fix, so be sure you are taking the financially healthy action needed to avoid debt moving forward!
What are the interest rates on your current debt?
Interest rates on debt vary widely. There are two main drivers determining the interest rates on your debt: your credit score, and whether the debt is secured or unsecured. Loans that are attached to collateral (secured) generally have far lower interest rates than loans that are not.
What type of mortgage should you refinance into?
Mortgage companies offer a wide variety of mortgage products. Here is a quick summation of some of them, according to some quick comparison points:
30 Year, 20 Year, 15 Year Fixed Rate Mortgage
In most instances, 15-year mortgages will have interest rates that are lower than 20 year and 30 year mortgages, as the quicker repayment period reduces the risk to the bank. However, as the time period of the loan is compressed, the overall payment will usually be substantially higher. By and large, 15-year loans should only be taken out if you can afford the higher payment and the extra money being tied up isn’t needed for something else.
Adjustable Rate Versus Fixed Rate Mortgages
Adjustable rate mortgages are also known as a 5/1 ARM, 7/1 ARM or a 10/1 ARM. The number to the left shows how long the rate is fixed for, and the number to the right shows the frequency the rate can then go up or down after the initial fixed rate period. For example, a 5/1 ARM means the rate stays fixed for 5 years, and then can adjust once every twelve (12) months after the initial fixed rate period. Adjustable Rate Mortgages usually carry a lower initial interest rate and payment than a fixed-rate mortgage, but make sure you are in the financial position to anticipate any potential increases in monthly payment down the road if the rate on your mortgage goes up. Typically, an ARM would be good for those who plan on selling their house prior to the fixed period of the loan ending, or plan on having additional principal to pay down the loan ahead of schedule.
Summary
So, you’ve gone through all the calculations above. You can afford a cash out refinance mortgage to clear your debt and keep a little extra “change” according to the initial scenario. Your credit score is good enough to get a good interest rate.
Overall, a plan to consolidate debt with a cash out refinance seems like a good idea. Here are some final questions to ask yourself before you start shopping around for a mortgage.
- How much is your home actually worth? Do some research and try to get an idea as to what your home will realistically be worth in today’s market. What your house was worth 2 years ago may be way more (or way less) than what you think.
- Planning to relocate in the near future? Make sure the costs associated with refinancing make sense when analyzing your overall financial picture. If you are moving in the next 12 months, then refinancing may not make sense from a cost analysis viewpoint.
- How do you avoid running up credit card debt again? This is the biggest challenge. What if you refinance, then get more credit cards and put yourself back where you started? The best way to avoid this is to set a budget. Get a sense of how much disposable income you actually have; most people who are in debt in spite of being employed and healthy don’t accurately forecast how much their lives cost.
The average home has appreciated in value over the past 2 years, and mortgage rates are significantly lower than credit card interest rates. As such, homeowners may be wondering whether a cash-out refinance for debt consolidation is a smart money move. If you are interested in using a cash out refinance to consolidate debts, try to have a plan to avoid accumulating that same debt moving forward. Unfortunately, many homeowners who use credit cards and then pay them off with a cash out refinance wind up back in the same situation a few years later, but this time without home equity to bail them out.
The Bottom Line
Cash out refinancing may make sense if you can lower your monthly payments, pay off high-interest debt and avoid incurring more debt after the refi. But it’s not always the best choice. If you are unable to make your monthly mortgage payments, you run the risk of losing your home.
Don’t simply consider the amount you’ll save by lowering your monthly payments. Also, take a look at the effect a reduction in home equity and lengthening the term on your mortgage will have on your overall financial situation, now and for however long you plan on staying in your home.
The best thing you can do is talk to someone who can review your personal finances and suggest a realistic option for you.
Click here to apply!