Cash out refinancing is one of the options that you have to consolidate debt. The truth is, you have a lot of options when it comes to getting out of debt. However, you need to take time to get to know each of them before you make a choice. This will allow you to determine if it is the perfect solution based on your financial situation. A debt relief program may boast huge savings but if you have the wrong financial conditions for it, there is a high chance that you will fail.
This is why it is important for you to do your research first. With the rising outstanding debt in the country, it is expected that a lot of people will be looking for a way to pay off their debts efficiently. The challenge is finding the perfect solution that suits you best.
One of the strategies that people use to get out of debt is to use their home equity. With the continuous decline of interest rates in the mortgage industry, it is not surprising that there is a recent rise in mortgage applications. And this is not just for new home loans. There is also a rise in people getting cash out refinancing to help them get out of debt.
What is cash out refinancing?
Not everyone is familiar with the idea of using this type of refinancing as a debt solution.
A cash out refinancing involves borrowing more than the balance of your mortgage. Let us assume that you borrowed $500,000 and you have paid off $200,000. That means you still have $300,000 as the balance of your mortgage. You will then refinance your mortgage by borrowing $350,000. The $300,000 will be used to pay off your old mortgage while the $50,000 will be left as a lump sum amount that you can use however you decide. For most people, they will use it to pay off other debts like credit cards, etc.
According to one report, mortgage lenders are expected to be more accommodating when it comes to approving applications. So if you are thinking about using your home equity to help consolidate debt, now is the best time to do it.
To help you decide if this is the perfect debt relief strategy, here are important things to know about it.
Steps to apply for cash out refinancing
- Get your home appraised to know how much equity you have.
- Look for a lender that offers the best interest rate and terms.
- Decide on how much you can borrow.
- Apply for the loan and wait for approval.
- Upon approval, use the loan to pay off your existing mortgage.
- Use the extra cash to pay off your multiple debts.
- Come up with a solid repayment plan towards the new lender and stick to it.
Cash out refinancing cost and fees
Refinancing your mortgage will involve a lot of fees. These include the application, appraisal, insurance, etc. All in all, it can cost you an additional $2,000 to $5,000 plus the pre-payment penalty and loan origination fee.
This is why it is important that you only borrow what you need. Not only that, but it is also a must that you ensure that you will get a lower interest rate. If you cannot get approval for a lower rate, then it does not make sense to refinance. You will be paying more if you end up with a higher rate. Time your refinancing application when the interest rate is down.
How can cash out refinancing consolidate debt?
Now that you know what cash out refinancing is all about, how can it help you consolidate debt?
The truth is, this is one of the risky debt consolidation options. After all, you are putting up your house as collateral. If you fail to pay your loan, you might end up losing your house. But if you do things correctly, there are a couple of things that cash out refinancing can help you with.
Gives you the cash to pay off your multiple debts
First of all, it will give you the cash that you can use to pay off multiple debts. As mentioned, this type of refinancing allows you to borrow more than your balance. That amount will be based on the equity and the appraised value of the house. The loan that will be approved can be used to pay off the balance of the original mortgage. The rest will be given to you as cash to be used however you want it. If you refinanced with every intention to consolidate, you can use this to pay off your credit cards, personal loans, student loans, etc.
Allows you to put all your debts under one loan
Since you used the lump sum money from the cash out refinancing to pay off your other debts, you have just successfully put all your credit accounts under one loan. There are so many benefits to this move. You do not have to feel too stressed trying to monitor all your debts. You just have to focus on one payment each month. This will help you redirect your focus on something else – like earning more or trying to reach another financial goal.
Lowers your interest rate since it is a secured loan
Finally, cash out refinancing will help lower the interest on your debts. This is, after all, a secured loan. You can thank your house for being the collateral. If you are consolidating mostly high-interest credit card debts, you will save a lot of money because of the lower rate. Of course, you have to be careful when using your home in debt consolidation. You need to make sure that you can afford to pay it back. Otherwise, it you might end up losing your home.