Home Refinancing & Debt Consolidation
If you have outstanding credit card debts or other high-interest debt, you may be scrambling to make payments each month with the disappointing knowledge that interest is eating up most of your payments. Consolidating your debts into a low-interest home loan can alleviate your financial pain.
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Home Refinancing Debt Consolidation
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If you own your home outright, or even have a mortgage on your home that you've been paying on for several years, refinancing can allow you to borrow against the worth of your home to pay off other debts, consolidating your debt into one payment. If your credit is good, the interest rate will likely be much lower than interest rates on credit cards or even auto loans, which translates into savings for you.
Refinancing Options
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Home refinancing offers several options for homeowners who need to use the equity in their homes to pay down debt. Most home refinancing options work by allowing you to borrow against the total appraised value of your home less what you owe on your mortgage. If your home is valued at $200,000, but you owe only $125,000, for instance, then you have $75,000 difference to borrow. A word of caution -- if you owe only $30,000 in high-interest debts, then it is best just to borrow an additional $30,000, rather than the maximum of $75,000.
Among the refinancing options is cash-out refinancing, which essentially pays off your original mortgage, then gives the rest of the money to you.
Home equity lines give you a revolving line of credit up to the difference between your mortgage and your home's worth. They typically require you to pay interest only for the first 10 years. The value of your line of credit increases as you make payments, and after ten years, the line of credit converts to a loan.
A home equity loan is a traditional amortized loan that you repay each month like a mortgage or car loan.
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Not for Everyone
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If home refinancing debt consolidation sounds too good to be true, that is because it often is for many homeowners. Homeowners whose homes have lost value may owe more on their home than it is now worth, meaning that any equity in the home has disappeared. New mortgage holders may not have paid down enough on their home to build up any equity. And in the worst case scenario, even if your home has not lost value or you have paid on your mortgage for several years, you may have more credit card or other debt than you do home equity.
Your Home is Your Collateral
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Perhaps the most important thing to remember if you are considering home refinancing to consolidate your debt is you are putting up your home as collateral. If you cannot repay your debt, you can lose your home.
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