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Pros and Cons of a Debt Consolidation Mortgage Refinance

A debt consolidation refinance can help you achieve two objectives simultaneously: obtaining a reduced interest rate on your debts and combining all your monthly payments into a single one. Essentially, this process entails combining your debt obligations and adding them to your mortgage but at a much lower interest rate. The outcome is a single payment at a lower interest rate, which is your monthly mortgage payment. Therefore, you can accomplish the twin goals of lower interest rates and simpler payment management through a debt consolidation refinance.

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The process of debt consolidation refinance involves paying off high-interest credit cards, medical bills, student loans, and other loan balances that you may have by borrowing a larger sum than what you owe on your home, and using the excess amount to pay off the debts.

You can avail of a debt consolidation refinance provided you have at least 20% equity in your home and meet the program's qualification requirements. Your lender will examine your credit score, job history, and debt-to-income ratio, among other factors, to determine whether you qualify, much like when you're purchasing a home.

Debt Consolidation Options

Cash-out refinance

This is generally a suitable alternative for property owners who have substantial loan balances and may not have a very low interest rate on their current mortgage.

The new loan will settle the initial mortgage while the surplus money will be used to repay the debt. The new lender may either pay off the debt directly or give the borrower cash to do so themselves. Additionally, if the interest rate on the existing mortgage is not competitive, this is an opportunity to decrease the interest rate on the outstanding balance concurrently.

Rate and term refinance

A rate and term refinance is precisely what it appears to be: The new loan has a lower interest rate and a longer term, as you're starting fresh with a new 30-year mortgage.

This is a beneficial method for dealing with high interest rates, especially if they have made it challenging for you to fulfill your monthly mortgage payments. The additional money that you save on your mortgage payment can then be utilized to reduce your remaining loan balance on credit cards, medical bills, and other outstanding loans.

Home equity line of credit (HELOC)

A HELOC allows you to borrow against the equity in your home without touching your current mortgage. This is terrific if you closed your loan at a great rate but still need to access your equity. The amount you borrow can be used to pay off loan balances. A HELOC works differently from a regular mortgage in that you pay as you use it.

The Advantages of a Debt Consolidation Refinance

A debt consolidation refinance has its advantages and disadvantages. On the plus side, you can repay high-interest debt in a shorter period of time, which can improve your credit score as your debt decreases. Additionally, the money saved from the lower interest rate can be allocated towards debt consolidation, enabling faster repayment of outstanding loan balances.

Reducing this debt provides you with more financial flexibility, as consolidated debt frees up your credit cards, giving you a cushion for emergency expenses. Moreover, you can use the money saved each month to build up your rainy-day fund, avoiding the need to rely on credit cards.

Furthermore, a debt consolidation mortgage streamlines the payment process by consolidating different loan amounts, due dates, and interest rates into one payment. The interest rate is typically much more favorable than high-interest credit cards, and the overall amount due is lower when you consider all of your debts and interest.

Things to Consider with a Debt Consolidation Refinance

The monthly mortgage payments will be higher for a debt consolidation refinance since it involves borrowing more than your current mortgage balance. However, the benefits can outweigh the costs if you have a lower interest rate and only one payment. It's important to ensure that you can afford the higher monthly payment. While you may end up paying more mortgage interest over the life of the loan, it's worth considering the savings compared to high-interest credit cards. It's also important to consider how long you plan to stay in your home since this new loan will likely be for 30 years, which means you'll have less equity if you sell earlier.

There are fees associated with a debt consolidation refinance, with closing costs typically between 2% and 6% of the loan. However, tapping into home equity can be a smart way to address other debts, especially since U.S. homeowners with mortgages have seen their equity increase, while credit card balances remain high. Using home equity to pay down other loan balances can be a wise decision. Team Andee is happy to show you how; give us a call today.


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