While there are often quite a few things you can do to reduce your debts, many find that refinancing their home and consolidating their financial commitments into one lump sum can be one of the most effective ways to reduce or even remove debt – and if you’ve found yourself struggling to keep up with these kinds of repayments, you may want to find out just how refinancing and consolidating could help.
Cash out refinancing
One option that you may want to consider when it comes to home refinancing to pay off debts are cash out refinancing loans. Often, this will allow you to transform the built-up equity in your home into money, which you could use any way you wish.
With such a large sum of cash you’ll often be able to take a large chunk out of, or even entirely pay off, high interest debts.
Taking your LTV ratio into consideration
Before you decide to go for cash out refinancing, you may want to make sure that you have enough equity in your home that the money you take out won’t leave you with a loan to value ratio higher than 80% before refinancing.
In general, if your LTV percentage is higher than 80, you’ll need to buy private mortgage insurance. PMI as it’s often called, can easily cost you an additional 1% of your loan’s overall value annually – which can add up to be quite a large amount over time.
Your loan to value ratio is typically the difference between your existing mortgage’s balance and the value of your property. If you plan to use the cash to pay off a high interest credit card debt, you might need to add the total amount of debt you’ll pay to the mortgage balance, too.
For example, if your mortgage’s current amount is $250,000 on a home that’s worth $500,000, and you want to pay off $10,000 in debt.
$250,000 plus $10,000 is $260,000, which divided by $500,000, is 0.52, or an LTV ratio of 52%. In this instance, it’s unlikely that you’ll have to worry about the additional expense of paying for private mortgage insurance.
Lower mortgage rates
Did you know that mortgage rates are currently close to historical lows? Many homeowners across the United States have refinanced to a lower rate in order to take advantage of these figures – but you may be able to use it to help you deal with high interest credit card debts, too.
There’s quite a large difference between 30 year mortgage rates (4.323%) and the average credit card interest rate (nearly 20%) at the moment, and by consolidating your debts to your home loan, you’ll often be able to save money based on the difference between the two when you make your payments.
Because of this, you may even be able to reduce your debts without needing the bonus money that the cash out option can offer.
Is refinancing the best option?
In some cases, refinancing might not be the ideal solution to your problems, which is why it’s often a good idea to consider the potential downsides before you make a decision on what to do.
For example, when consolidating your debts with your mortgage, your home loan’s balance will be raised by the amount of debt that you’re paying off, which could increase your monthly payments.
Additionally, by refinancing you might also change the term of your mortgage. This can sometimes be a bonus, as it can give you the choice to lengthen or shorten your term (which may be useful in some situations). However, if you want to just continue with your current term, you may not have much of a choice.