Can I Consolidate My Debt With My Mortgage Loan?
Many people consolidate their debt by taking out mortgage cash-out refinance loans. The term "cash-out" refers to disbursed mortgage funds that are used for something other than paying off an existing mortgage. Lenders allow people to extract equity as cash for any legal purpose including paying off existing creditors.
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Loan-To-Value Maximum
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The lender to government-backed entities, Freddie Mac and Fannie Mae, sells many mortgages that are originated in the U.S. These firms do not take on cash-out mortgages that exceed 80 percent of the home's value. Due to this restriction, most lenders do not write cash-out refinances loans with loan-to-value ratios that exceed 80 percent. Some lenders who retain mortgages, offer cash-out refinance loans with higher LTV ratios but usually only to individuals with high credit scores and income.
Consolidating First And Second Liens
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When you refinance a mortgage, you have to pay off the existing mortgage and any second lien home equity lines or loans that are attached to the home. Because home equity lines have revolving balances, lenders regard any loan that involves paying off an equity line as a cash-out refinance. Refinances that payoff a mortgage and a fixed-rate home equity loan are classified as straight refinances. LTV maximums are usually higher for straight refinances and rates are often lower because lenders view the loans as less risky then compared with cash-out refinances.
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Benefits Of Consolidating Debt
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The two principal benefits of a mortgage debt consolidation are a lower interest rate and a lower monthly payment. Unsecured forms of debt such as credit cards have higher interest rates than loans with collateral. Auto loans often have low rates but term times are generally limited to seven years of less. People can lower the interest they pay on credit cards and lower the amount they spend on their auto loans each month by consolidating the debts in a cash-out refinance.
Downside Of Debt Consolidation
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In most states, creditors cannot put a lien on someone's house if that person defaults on a credit card or unsecured loan. Anyone who defaults on a car loan stands to lose the car as opposed to their home. Once debts are consolidated, the borrower's home is at risk if they default on payments. Additionally, there are significant closing costs involved in a refinance, and in some instances, the closing costs offset any financial benefit stemming from lowered payments and reduced interest rates. In the long-term, people often end up paying more by refinancing because the loans accrue interest over a period lasting between 15 and 30 years.
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