Mortgage Refinancing Options for Debt Consolidation

Did you know the average household pays over $6,000 in credit card interest each year? Six thousand in interest, which doesn't even include the credit card balance. That statistic alone is one of the many reasons why refinancing to consolidate debt is an attractive debt management option. It makes debt payments more affordable, and frequently, it can help with building your credit.

Credit card debt tends to be some of the most expensive interest rates, with many cards charging upwards of 16% interest. Whereas mortgage refinancing to consolidate debt is effective because of the historically low home loan rates. Think of it this way. For every thousand dollars of finance on a house, the average person pays around four or five dollars. Borrowing money cheaper means that it's possible to save more money, helping individuals pay off higher debts faster and more efficiently.

How debt consolidation works

Say you have a combination of credit cards, personal loans, student loans, and car loans. Regardless of your income level, it can be difficult to keep track of all those payments every month. One missed payment could negatively impact your credit score and prevent you from obtaining financing in the future.

Debt consolidation involves combining those debt obligations into one manageable monthly payment. Borrowers who choose to go this route no longer worry about different interest rates or outstanding balances.  Instead, their focus shifts to a low-rate mortgage that saves them thousands in interest.

How to qualify for a mortgage with debt

Are you looking to pay off your high-interest debt altogether? Then you'll need enough equity in your home to move forward. A cash-out refinance is an attractive option for many equity-rich homeowners. 

Lenders typically require at least 20% equity for a debt consolidation mortgage. The reason is that they want you to have a minimum of 20% equity remaining after the refinance. In turn, the more equity you have, the more cash you will receive.

Cash-out refinance programs are available to borrowers with conventional, VA, and FHA loans. Credit score requirements vary by lender and loan type, among other factors. To qualify for a cash-out refinance, you will also need to prove a strong employment history and financial profile.

Advantages of a debt consolidation refinancing

As we mentioned above, you can enjoy significant savings by consolidating debt with a refinance. Whereas you might be swimming in credit card debt now and wasting money on interest, debt consolidation helps you put more of your money toward the principal balance. There's no question that this type of mortgage will have you knocking out debt and achieving your other financial goals faster.

If you decide that consolidating debt is the right choice for you, here are some things you can do to get started.

Make larger lump payments when paying credit card debt

One big mistake when paying off credit card debt is splitting payments between multiple cards. But did you know that carrying a high balance on any one card negatively affects your credit score? If you have two hundred dollars, many people split the money by paying one hundred dollars toward each card. But to pay off cards faster, you should use these larger lump payments and put the full amount toward one card's principal payment.

Work diligently to pay down the balance on all of your credit cards, starting with the highest interest rate cards (known as the debt avalanche method). When it comes time to pay the next card off, you can use what you ordinarily put toward the first card and pay off a larger amount of the second card. Typically, this makes it possible for borrowers to pay off debt faster and get them back on track.

Alternatively, some borrowers prefer the debt snowball method. This strategy involves paying off your smallest debt first instead of the debts with the highest interest rate. The idea is that you'll gain confidence with a quick win and then watch your debt payoff success "snowball" as you put additional funds toward debts with higher balances.

There are countless resources available regarding what debt to pay off first. While some might opt for high-interest credit cards, others might prefer tackling their student loans before anything else. Come up with a plan that works best for you and then stick with it — it won't be long until incremental progress turns into a life free of credit card debt!

Make changes to your budget

Be mindful of money going out each month. Don't use too much on entertainment, expensive hobbies, or going out to dinner. Maybe cut back on how many cable channels you subscribe to. Determine what isn't necessary for the time being and use your spending money toward existing debt.

Trust us; these short-term sacrifices will pay off in the long run!

Keep revolving accounts open

People sometimes think the best way to decrease temptation is to close out cards as they pay them off. This is not the best choice if you have multiple maxed-out credit cards or even just one. You have none of your credit available when all your cards are maxed out. By paying off cards and then closing the accounts, you end up with none of the credit available again. Instead, keep the accounts open to free up some of your credit available as you pay off cards. Let your hard work pay off by leaving revolving accounts open.

• Stick to a plan that will keep you out of debt

The key to staying out of debt is to keep taking on new debt after your refinance. It can take a lot of self-discipline to make it work. Ask yourself how you got into debt in the first place. People have to take personal responsibility for the debt incurred and take steps to improve their overall financial health. Doing so will, in turn, help with building your credit.

Want to learn more? Check out our Money Management Tips!

Know that everyone makes mistakes when it comes to incurring debt. If you've started saving and have managed to start paying off bills, you can feel comfortable with refinancing your mortgage to consolidate debt. When done correctly, people can save thousands of dollars a month, not only in interest rates but also in tax breaks you only get on mortgages. Paying off debt takes dedication and hard work, but you can make it easier on yourself and become debt-free by taking the right steps.

Choose the lender who works for you

There are many options when it comes to a debt consolidation mortgage refinance. Be sure to do your research, weigh the pros and cons, and choose a company that will guide you through options — finding the right program for your financial situation. This is no easy step so even though the burden of debt is challenging, who you choose to guide you through this process is important.

At a minimum, the debt consolidation process will look like this:

• Debt consultation - A discussion about refinancing benefits. Share your debt obligations, needs for refinancing, and what you plan to accomplish
• Applying for a loan program - Complete your application online or over the phone with a mortgage consultant.
• A thorough check of your credit - Income verification and a credit check through various credit agencies. This will determine if your application can be approved by the lender.
• A review of all loan options - Review all the available mortgage programs that make sense for you.
• Collection of financial documents - Gathering your documents to verify your employment, income, debts, etc....
• Mortgage processing - Documents are organized for a thorough financial review.
• Home appraisal - A quick evaluation to determine your home's value.
• Conditional approval - The last step before a mortgage approval. Additional documents may be needed.
• Final approval - Once conditions are satisfied, documents are prepared for signing.
• Closing - Sign your documents, and close your loan.

Take the next step

Debt can bring many feelings — from anxiety to helplessness, maybe even ignorance. No matter how much debt you have, you need to remember you are not your debt. So face the numbers and create an action plan to get out of it because making minimum monthly payments will get you nowhere fast. Instead, make a greater impact by consolidating your debt.