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What is Cash-out Refinancing?
What is Debt Consolidation?
If you’re burdened by debt and don’t qualify for a personal loan or balance transfer credit card, debt consolidation could be the key to alleviating your stress. Debt consolidation is the process of taking out a new loan to pay off existing debt. When this happens, your current loans are bundled into a single, larger loan.
The new mortgage you take on when you cash-out refinance can be the loan you use to consolidate your debt. Once you use the cash from your refinance to pay off your debt, that debt is combined with your mortgage and is thereafter eligible for lower interest rates and tax benefits.
Please speak to your financial or tax adviser about your specific situation.
Things to Consider Before Using Cash-out Refinancing to Consolidate Your Debt
It’s important to note that debt consolidation doesn’t get rid of your debt outright—it’s meant to reorganize it and make it more manageable. Before deciding to manage your debt with a cash-out refinance, you should consider the following:
- You must have enough equity to cover the amount of your new loan. Lenders generally allow up to 80% loan-to-value (LTV).
- The goal of debt consolidation is to make your debt more affordable. Because of this, it only makes sense if the interest rates on your refinance are lower than what you’re currently paying and the new monthly mortgage payment is less than your total payments right now.
- The loan application process can be challenging. Like with most home mortgages, you must qualify based on your credit, income, assets and liabilities and be able to afford fees and closing costs.
- Because debt consolidation doesn’t erase your debt, you still have to make payments responsibly and be extra diligent about keeping any further debt in check.
- Debt consolidation puts your home at risk for loss. Credit card debt is unsecured, meaning if you default on it, it can only affect your standing with creditors and lenders. But if you can’t pay back a mortgage—a secured debt—lenders can take your home.
There are advantages and limitations to cash-out refinancing for debt consolidation, so it’s not ideal for every borrower. The experts at Global Equity Finance will work with you to determine the absolute best option for getting your debt under control today.
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