Should You Refinance Your Mortgage To Pay Off Your Debt?
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The average American household has $ 92,727 in personal debt, according to Experiential data – and if you’re in a similar situation, you might be looking for a way to consolidate your balances and save on interest.
One option that you can use if you are a homeowner is cash refinancing, but there are pros and cons to consider before taking this approach.
Here’s how to know if using a refinance with withdrawal to pay off high interest debt is right for you:
How refinancing your mortgage can help you pay off your debt
When you refinance a mortgage One of the main advantages of paying off your debts is that you pay less interest. Mortgage rates are much lower than the rates of other consumer products like credit cards, personal loans, and private student loans.
How you use refinancing to pay off your debt depends on whether you are doing rate and term refinancing or cash flow refinancing.
Refinancing at rate and duration
Best for: Homeowners who qualify for a lower interest rate and have a low debt balance
A interest rate and term refinancing allows you to take out a mortgage with a new loan term, a new interest rate, or both. The old loan is paid off and you make payments on the new mortgage over time.
Ideally, you save money with a lower rate – and with those savings, you pay off your debt at a higher interest rate.
Refinancing of collection
Best for: Homeowners who pay a high interest rate on a large amount of debt
When you do a refinancing of collection, you take out a new mortgage for more than you owe, pay off the original mortgage, and collect the difference in cash. You can then use that money to pay off other debts.
To be eligible for refinancing with withdrawal, you must have sufficient home equity and meet credit requirements.
How to qualify for cash-out refinancing
The qualifying requirements on a cash-out refinance differ from those on other refinances because you are borrowing against the equity in your home.
If you decide cash-out refinancing is right for you, be sure to compare as many options as possible to find a good deal. Credible makes it easy for you: you can compare multiple lenders and view personalized prequalified rates in just a few minutes.
Advantages and disadvantages of refinancing to pay off debt
The most immediate benefit you get from refinancing is that you save money. But this decision can also impact your credit scores, and you’ll need to consider the costs involved. Consider these pros and cons before refinancing your home to pay off your debt.
- You could save money every month. When you use rate and term refinancing to consolidate your debt, you get a loan with a lower interest rate. The benefits are twofold: Not only do you save money on interest, but you also get a lower mortgage payment.
- You could pay off the debt faster. Your other option is to use cash refinancing, which increases your mortgage payments, but allows you to pay off high interest balances quickly.
- You could benefit from a tax advantage. The interest you pay on a mortgage is tax deductible if you qualify and itemize your deductions. Balances you pay off with refinancing, such as credit card debt, are generally not tax-efficient.
- You are using your house as collateral. When you use withdrawal refinancing to consolidate credit card debt, you are essentially converting unsecured debt to secured debt. Your mortgage payments will go up and if you can’t keep up with them, the bank could foreclose on your property.
- Closing costs could eat into your savings. Do the math to see if the refinancing fees worth it. Closing costs, which are fees you pay the lender to process the loan, cost around $ 5,000 on average. You can usually choose to pay these fees up front or transfer them to the new mortgage.
- The loan could affect your credit scores. When you apply for refinancing, the lender does a thorough investigation of your credit reports. This could temporarily lower your credit scores. Refinancing also resets the average age of your credit history, which could also impact your credit.
Learn more: How To Get The Best Mortgage Refinance Rates
Should You Refinance To Pay Off Your Debt?
Refinance a home loan at consolidate debt might make sense if you qualify for new loan terms that help save you money.
Here are some questions to ask yourself before applying:
- What type of refinancing is right for me?
- Am I eligible for refinancing?
- If I refinance with cash out, can I afford the new mortgage payment?
- If I refinance at rate and term, how much money do I save each month?
- If I change the term of the mortgage, will I end up paying more interest overall? Am I okay with that?
Other ways to pay off debt
There are other ways to pay off the debt without using your home as collateral. Start by figuring out how much you earn, how much of your income goes towards essential expenses, and how much you have left, which you can spend on your debt each month.
Next, consider the following strategies for paying off your debt. The best method depends on your financial situation or your preferences.
Get a balance transfer credit card
Best for: People who can pay off their debt in a relatively short period of time
A balance transfer allows you to transfer multiple debt balances to a single credit card. Some come with a 0% introductory APR for an extended period, typically 12 to 21 months. If you can pay off the balance within that time, you can save money.
The interest rate usually increases after this introductory period, so if you have a balance left, your debt could get expensive.
This option also might not help much if you cannot consolidate all of your debts. You can benefit from different loan terms and the issuers can limit the amount you can transfer to the account.
Getting a debt consolidation loan
Best for: People who want to repay their debts over a longer period
A debt consolidation loan is generally an unsecured Personal loan that you repay in installments, usually over three to five years. This can be a good option if you have one with good terms and prefer a predictable payment schedule.
Use the debt snowball method
Best for: People with relatively low debt and low interest rates
It might not be worth consolidating debt if you have small balances that you can pay off in a year, or if you don’t qualify for a personal loan or credit card.
With the debt snowball method, you make the minimum payments on all of your debts each month, but you invest the extra money first for your smaller debt. Then move in order from the next smallest balance to the largest. You should gain momentum like a snowball rolling down a hill.
Using the debt avalanche method
Best for: People with high interest rate debt
Also a good option for people who don’t qualify for a loan or credit card, the debt avalanche method helps you save money on interest.
You make the minimum payments on all of your debts, but put your additional income on the balance with the higher interest rate. Once it’s paid off, keep moving to the balance with the highest interest rate until all of your debt is gone.
Consider a debt relief program
Best for: People who cannot afford to pay their minimum monthly payments
You might need professional financial help if you can’t pay off your monthly debt, can’t pay off your unsecured debt in a few years, or if your debt is more than half of your income.
Contact a nonprofit credit counseling organization. A licensed financial advisor can review your finances with you and help you develop a plan of attack.
If you’re still ready to refinance, Credible can help you find the latest rates for your next mortgage refinancing. With Credible, you can compare multiple personalized rates from our partner lenders in minutes – it’s free, secure, and won’t affect your credit score.