Can I Use the Cash From a Refinance to Consolidate My Debts?
Homeowners who refinance can use cash from the new mortgage for any legal purpose. Many people use refinance cash to consolidate debts such as car loans, student loans or credit-card debt. Home loans usually have lower rates than other kinds of loans because the collateral reduces the lender's risk.
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Reduce Payments
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The interest rate of a loan directly impacts the size of the monthly loan payment. Cars are classified as depreciating collateral by lenders because over the course of time, the value decreases. Generally, lenders charge higher rates on vehicle loans than home loans and limit loan terms to five or six years to ensure vehicles are paid off before the value drops dramatically. Refinancing a vehicle loan into a home loan usually means payments are lowered because the interest rate is smaller and the term is longer.
Interest Rates
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When people consolidate their credit-card debt with mortgage cash-out refinance loans, they often end up paying more each month. Typically credit-card holders must make a minimum payment that covers mainly interest each month. Due to high interest rates paid by many people, it can take years to pay off relatively small balances. Mortgage payments are designed to pay of both principal and interest, so payments are often slightly higher than on credit cards, but people reduce their principal much quicker than if they make minimum credit-card payments.
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Mortgage Interest Rate Considerations
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Conventional mortgage refinance loans enable people to borrow up to 80 percent of the value of their homes. Regular refinance loans involve paying off the old mortgage. Cash-out refinance loans have higher interest rates and involve paying off other debts or extracting equity as cash for some other purpose. Because the rates are higher for cash-out refinances, many people take out second mortgages rather than pay off their first mortgage if they already have a low mortgage rate.
Warning
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Many lenders directly pay off credit-card balances with funds from a refinance loan immediately after the loan closing. However, paying off a credit card does not result in the card being closed. The cardholder must separately request that the card issuer close the card after the payoff. Some homeowners run into problems when they consolidate existing debt with a refinance but leave their credit lines open and start to run up the balances again.
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