When you are a homeowner, you have the option to refinance the mortgage of your home to pay off debt. This debt can include credit card debt, student loan debt, or any other kind of looming debt you’ve accrued. You can tap into the equity of your home to access funds quickly and pay off your debt.
When refinancing your mortgage to pay off debt, there are some factors you need to remember. The number one factor you’ll need to be aware of is making sure you have built up enough equity in your home. The general rule of thumb is to never owe more than 80% of your home’s value after refinancing. You’ll still be allowed to refinance if you do wind up owing more than 80% of your home’s value but you’ll have to buy private mortgage insurance. By calculating your loan-to-value ratio (dividing your mortgage by the approximate value of your home) you can determine if you’ll owe more than 80% of your home’s value.
Using this method to determine how much equity you actually have to pull from your home when you refinance without having to pay mortgage insurance can be helpful in your decision to refinance to pay off debt.
Refinance mortgage to pay off credit card debt
It’s common to quickly find yourself with a lot of credit card debt that you weren’t aware of. It happens to many people. Refinancing your mortgage is one way you can pay off that credit card debt, especially before the interest starts to build up and you owe even more money.
The interest rates on most credit cards are exponentially higher than the interest rates on your mortgage. It’s financially savvy to pay off your debt with the highest interest rate first before worrying about your debt with the lower interest rate. The higher the interest rate, the more quickly you get buried in debt. For this reason, refinancing your mortgage to pay off credit card debt makes sense because the interest rate on your mortgage will be much lower. You can refinance your credit card debt into your mortgage and now, your mortgage amount might be higher but it’ll be at the same low-interest rate as the rest of your mortgage amount.
Also, if you’re refinancing your mortgage to pay off credit card debt then it’s best to remember that you can consolidate all of your credit card debt into fixed monthly payments instead of paying a revolving balance every month.
Refinance to prequalify for new home loan
Another reason to refinance your home is to prequalify for a new home loan. Yes, it’s possible to use the equity you built in your home to prequalify for a new home loan.
Prequalification is an early step in the home buying process. When you prequalify, you get approved for a set amount of money that a lender will loan to you for a home. This set amount of money is determined by a couple different factors, one of them being a down payment amount. This down payment amount can come from refinancing your mortgage.
Since refinancing allows you to tap into your home’s mortgage and access a large lump sum of money, that same sum of money will look great as a down payment to prequalify for a new home loan.
It can also be used to pay off debt so when lenders look at your financial situation and determine how much you qualify for, they will notice your debt is paid off.
Refinancing an existing mortgage to prequalify for a new home loan might seem like you’re achieving the opposite of what you want, but works great for individuals who want to get into real estate investing or even help a family member buy a home.
Factoring closing costs into your refinance to pay off debt
When refinancing to pay off debt, you’ll want to be aware of closing costs eating away at the money you’ll get from tapping into your home’s equity. This is the same money that you will be using to pay down debt.
When doing your research about refinancing your home, it’s best to compare closing costs to interest savings to see if it even makes sense in your situation to refinance. Paying thousands of dollars in closing costs to save yourself tens of thousands of dollars in interest on your balance makes sense. However, it financially doesn’t make sense to pay thousands of dollars and only save yourself thousands of dollars of interest by refinancing.
Saving yourself on the interest of the debt you plan on paying off is the goal. If you’re going to pay thousands in closing costs then it would make more sense to save as much money on the debt’s interest as possible.
Refinance your mortgage to pay off debt wisely
Always refinance your mortgage to pay off debt wisely. Refinancing to pay off everyday day expenses isn’t advised because it will keep you in debt and keep bills coming your direction, especially after considering how long it takes to refinance a home these days. Most people refinance their mortgages to pay off one-time expenses that could really accumulate over time. This typically includes credit card debt, student loans, or even medical fees.
Factoring in the interest of the debt you’re paying off is something you have to do before refinancing so you can be sure that the amount you’re paying off is worth the refinance. Closing costs don’t come cheap so you have to weigh the fee you’ll have to pay of the closing costs against the interest you’re going to be saving by paying off your debt.
Understanding how mortgages work is a must if you want to be successful in refinancing your own home. As long as you can stay on top of your payments, then you should have nothing to worry about when refinancing your home. If you’re factoring debt into your refinancing situation, it’s always best to remember that you can consolidate your debt and that you shouldn’t use refinancing for everyday expenses.
Refinancing your home to pay off debt isn’t a bad thing and doesn’t have to be tricky or difficult. You can leverage your good standing equity that you built in your home to pay off other debts and that’s a wise decision to make when done correctly.