Refinancing to Pay Off Debt: Exploring the Options

Paying off debt can take forever. It piles up fast. But, there are solutions. If you have home equity, a mortgage refinance can help. Here's how.

If you own a home and have some equity, refinancing to consolidate and pay off debt can make life a lot easier. But is it the right choice for your situation? Below are four questions you’ll want to ask before seeing your mortgage lender.

1. Are my credit card charges adding up?

Monthly interest rates deserve attention, especially since many credit cards include a double-digit interest fee on top of your monthly payment. If you’re not careful, they can add up quickly. Take action to lower your burden. With current mortgage rates near historic lows, it may be the perfect opportunity to consolidate debt and put yourself on the track to financial freedom.

What to watch out for: adding to your existing balances. It’s important to be disciplined as you work toward paying off debt. By rolling credit card debt into your mortgage, it may leave you thinking out of sight, out of mind. That’s certainly not the case. This plan is meant for borrowers who can commit to bettering their financial situation by consolidating debt.

2. Will extra cash help cover unplanned expenses?

You can also refinance to access a portion of your home’s equity as cash. If you have to pay for a major expense in the future such as a child’s college tuition, an unplanned medical expense, or a necessary home improvement project, your newly liquid assets can help to cover the costs without taking out a higher interest loan.

What to watch out for: taking too much cash. Make sure you have enough equity that the funds you take out of your home won’t leave you with a loan-to-value ratio of more than 80%, post-refinance. Exceeding that ratio means that you’ll have to buy private mortgage insurance, which can easily cost 1% of the loan value every year. On a $250,000 mortgage, that would be $2,500 annually.

3. How long will I stay in my home?

It makes sense to refinance your mortgage if the interest savings are greater than your closing costs. How can you determine that? First, find your breakeven point — otherwise known as the point at which savings from refinancing outweigh the cost of the new loan. For example, let’s say your closing costs are $2,800 for a mortgage that will cut your monthly payment by $300 monthly. Ten months in, you’ll earn back (or “recapture” to use industry parlance) your closing costs and then some, a good deal if you have a number of years left on your mortgage.

What to watch out for: closing costs always accompany a refinance. Make sure you will own your home long enough to cover the closing costs you’ll pay to get the lower payment. If you’re planning on selling your home before that breakeven point, refinancing isn’t for you right now.

4. Am I ready to commit to the process?

Like any major financial transaction, refinancing a mortgage requires a commitment of time and energy. Know that you’ll be expected to provide a variety of paperwork, so try to always be available — especially if your aim is to cash in some equity. The sooner you meet deadlines, the sooner you’ll see your money.

What to watch out for: if you cannot submit all required paperwork in a timely manner, it may result in a lengthy process.

Deciding whether or not to refinance your mortgage is a big decision that should be considered carefully. If you are currently paying off a large home loan, refinancing your mortgage for even a small percentage difference in your interest rate can result in major monthly savings. But don’t merely jump in for a quarter-point improvement. Consider the above questions before deciding to refinance, especially if your end result is paying off debt.

What do your peers say?

Still unsure of what to do? Listen to what some of your peers have to say, there may be one or more experiences here you can relate to:

I was looking to refinance for paying off debt, plus taking cash out to remodel my kitchen. I called American Financing because they are a local company, and I didn’t want to deal with one out of state. The mortgage consultant I worked with totally understood my needs, and she was extremely helpful from start to finish. I was very surprised by the short amount of time it took from the initiating of my loan to close. It was much easier than I imagined! I’m very happy I chose American Financing. Thank you for making my refinance so hassle free!
Marie S.
I worked with American Financing on a cash out refinance of my existing loan. I had originally been working with another lender for this refinance so I could pay off some outstanding debt and fund some home remodeling, but the process had become very frustrating — for many reasons. So, I contacted American Financing to explore my options. The rep listened to my story and presented me with my options. My loan closed in 14 days, and I could even lock in at a lower rate, with lower closing costs — in addition to paying off debt and remodeling. I highly recommend American Financing to anyone who is in the market for refinancing a home loan.
I’ve refinanced a few times in my life, but it has never gone as smoothly as this. Thank you, American Financing. My mortgage consultant and processor set clear expectations with me and outlined my requirements very carefully. Bottom line is within a three week window, I’m now closing on my refinance. This will help me immensely with my kids college and some home improvements. Kudos to these true professionals!
John P.

When you’re ready, let us help! At American Financing, we are currently saving customers anywhere from $500-$1,000 a month through refinancing. Why not see what we can do for you?

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