Are you overwhelmed with debt? Have you considered consolidating your debt with a refinance so you can pay off those highest interest debts now, saving yourself money and stress?
If you own a home, you may discover that refinancing can be the perfect option for consolidating and paying off debt.
How Can Refinancing Help You Consolidate Debt?
- Free up money to pay down urgent debts
- Save you money on interest
- Save you money spent paying late fees
- Protect your credit record, which enables you to continue to get good credit options at decent interest rates
When is it a Good Idea to Refinance to Consolidate Debt?
- To pay off credit card debt if your rates just jumped up to unreasonable proportions
- To pay off medical bills or other unexpected bills that may result in legal action
- To get a fresh start on finances, relieving you of the emotional stress related to calls from debt collectors
4 Debt Consolidation Refinance Options
1. Open a Home Equity Line of Credit
If you have equity built up in your home, opening a home equity line of credit can feel like borrowing from yourself. Once you’ve opened the line of credit, you can use money from the home equity line of credit to pay off high interest debts such as credit card debt and to pay bills on time (avoiding costly late fees and paying more interest). The interest you pay on a home equity line of credit is tax-deductible. You can take your time paying back the home equity line of credit, as long as you can make the minimum payments. For many people, opening a home equity line of credit is the very best option available.
2. Refinance
Refinancing may be the better option for you if interest rates have dropped since you originated the loan, meaning you could refinance your home at a lower interest rate and use the extra money you’ll save each month to pay down high interest debt. You could also inquire about a cash-out refinance, where you refinance your home and take out a percentage of the equity that has built up. You can use that cash for other financial obligations.
3. Take Out a Second Mortgage
If interest rates have not dropped enough to be in your favor with a traditional refinance and you do not have the option of opening a home equity line of credit, you may want to see if you qualify for a second mortgage. There are three kinds of second mortgages to consider:
- The traditional piggyback second mortgage
- The no equity second mortgage
- The125% second mortgage
Second mortgages offer varying amounts of cash availability, dependent on how much you’re willing to pay in upfront fees and higher interest rates, but they can be useful if you need immediate cash to pay off debts that are incurring even higher interest rates.
4. Refinance an Existing Second Mortgage
Perhaps you took out a second mortgage a few years ago to fund the opening of your business or to go back to college, but you no longer want that expensive second mortgage hanging over your head. If you’ve got a second mortgage, but it is incurring high interest rate charges, you may wish to refinance such as to incorporate the second loan into the first. This will work if you’ve paid down enough on both loans and the house appraises high enough in value to substantiate the consolidation of the two loans into one primary loan, especially if current interest rates are low.
Pitfalls of Debt Consolidation Refinance Options:
Home Equity Line of Credit
Be sure not to view this as an unending source of free income, racking up yet one more debt that will one day overwhelm you.
Refinancing
Make sure interest rates have fallen enough to make the closing costs and other expenses related to refinancing pay off.
Second Mortgage
Compare interest rates and closing costs to make sure you’ll really come out ahead after paying off your other debts. Have a long-range plan for paying down the second mortgage long before you intend to move so you won’t have to come up with the extra money to satisfy the loan when you want to sell the house.
Refinancing an Existing Second Mortgage
Check to be sure the savings will compensate for the refinancing costs.
What should you do Before Refinancing for Debt Consolidation Purposes?
- Clean up your credit report so you’ll get the best rates
- Comparison shop to determine best lender rates and fees
- Compare lender stability to choose the best lender
- Crunch numbers to make sure you will benefit from a refinance
Helpful Refinancing Tools and Resources
Use these calculators to help you determine if any of the mentioned options might benefit you:
Piggyback Second Mortgage Calculator
Refinancing Calculator/Debt Consolidation Calculator
How to Get Started on Debt Consolidation Refinancing Procedures
To get refinancing advice regarding options that will help you consolidate and pay off debt, click here.
Comments