Refinancing Your Mortgage to Pay Down Debt, Does It Work?


Are you surrounded by debts? Averagely, American citizens carry more than $35,000 personal loans. This number doesn't include home debt. Very few Americans say they have zero debt, say about 20%. Maybe you've been pressured by the high - interest charges from personal loans and credit card debts. Again, could you have a good home equity amount? Do you want to take advantage of refinancing and low - interest mortgage rates for repaying another debt? Well, the idea could be tempting, but it requires keenness before coming up with the right decision. Please read this post to understand the factors involved before filling the mortgage papers for a refinance.

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Considerations before refinancing to pay off debt

While there are various mortgage refinancing ways to pay off debts, coming to that decision needs a second thought. The options could be such as taking a cash-out or lowering your monthly payment. A cash-out should be option number one when choosing to pay off a large debt. But let's look at the factors to consider before applying for a home refinance for debt repayment. They include;


The additional costs involved.

Paying some fee in advance is a requirement when refinancing a mortgage, taking a home equity loan, or opening a HELOC. The amount paid upfront depends on the loan type you're taking. Some loans have a lower interest rate compared to others. For instance, a home equity loan (lower), whereas a HELOC loan (higher). In case you shop around consulting more lenders, the interest rates may be lower than thought. Refinancing and home equity loans both have extra charges. The best way to avoid these costs is by finding out more lenders and comparing the terms available. Additionally, you should understand that credit card and home equity loans require fewer upfront charges but come with higher interest rates. It would be better if you chose a cash-out to refinance.


Your home's value

Do you know the worth of your home? It's good to understand its value and the much you owe on it. Most lenders closely check the involved figures before approving you for a second mortgage. For example, say your existing mortgage was with something below 20% equity, another home loan can never be given under a similar condition. A good illustration is having a home valued at $100,000, but you still haven't paid off $80,000, it won't favor you. Sometimes even with more than enough equity, refinancing debt is a bad idea. Various homeowners found themselves in a big mess after the past house crash. They had highly invested in their home equity amounts when home prices inflated. However, things turned upside down, and prices suddenly came down, making them owe more than their homes' values. Such a situation is challenging to be in since you possibly can't sell the house to get out of a mortgage. That's why it's vital to know the reality of the trend of prizes in your residence. Without surety, it's best if you consult a local realtor.


The difference in interest paid

How much will you save from refinancing? It may seem like the interest you'll pay will be reduced by half or more. An example is refinancing a $20,000 mortgage at 4% instead of 18%. Don't forget that adding debt into an existing mortgage will result in making payments for longer, by doing that you'll likely pay a similar interest or more, regardless of the reduction in interest.


Your home may be on the line.

Presently, maybe your loan type is unsecured and with high-interest rates. Your creditor can take your property in case you defy payment. That's why it'll be a mistake transfer ring this high-interest loan into your mortgage or home equity. Your home is likely to be among the properties at risk of being taken when you fail to pay as expected. Doing that will also raise the monthly amount paid on your mortgage. Well, it doesn't necessarily have to be that way. Mostly, the general payments may significantly fall when paying your high-interest loan with a mortgage refinance. You should really consider such a situation first.


How long will you live in that house?

What are your future plans about moving in? Is it in the next few years or longer? If it's in a short duration, then refinancing isn't a great idea. The longer you are moving in the future, the better position for recouping your costs. Be sure if you want to lose or save that money.


Confirm if you really need to get into another debt

You need to have a reason for getting into debt again. Let's say maybe a misfortune befell you. A good example is getting involved in an accident that left you vulnerable, you can't work. Go for a refinance if you earlier had an excellent cash management plan. Otherwise, be patient and retain your old habits until things get back to shape. For a heavy spender who is simply putting themselves in hefty loans, refinancing doesn't make sense. Unless you are ready to put your home on the line by rolling in the unsecured loans. Things will become if your overspending habits don't stop. You might get trapped with a larger mortgage payment and credit card debt. Reach out to Loan Advisor for more information and tips on refinancing.


The Bottom Line

Clearly, getting approved for a home loan is among the most affordable money borrowing ways. It could be a cash-out refinance or a HELOC. A cash-out refi can help pay off a large loan depending on your qualifications. However, deciding to utilize your mortgage to pay off debts is situational. It's not an easy thing to do. At times, you might convince yourself about how much it makes sense with a surety of saving and shifting to a debt-free zone. But, it may not be as you think because it can get you into more challenges. Please find out more from a financial advisor, lender, and real estate agents about how things should work for effectiveness..