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Refinancing to Pay Off Debt: Low Rates, Great Savings

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 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 making a decision.

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. It's time to take action. Rates are still low making now a great time to put yourself on 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, so you don't end up 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 is that determined? First, find your breakeven point — otherwise known as the point at which refinance savings outweigh new loan costs. For example, let's say your closing costs are $2,800 for a new mortgage that offers $300 in monthly savings. Ten months in, you'll earn back (or recapture) your closing costs and then some. It's 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 to sell 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 goal is to cash in 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.

If refinancing to pay off debt sounds like the right solution for you, take a moment to fill out our form for more information. You can also read our checklist of what to expect when closing on your mortgage refinance.

If you're still unsure how to handle paying off debt, you're not alone. 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.

Person using mobile refinance calculator

An easy, next step in the research process is testing one of the many mortgage refinance calculators available to you. They offer an easy way to see potential cost savings that may come from a new loan. You may also want to review our money management tips.

When you're ready, we're here to help you save anywhere from $500-$1,000 a month through our mortgage refinance options. Schedule an online appointment with one of our salary-based mortgage consultants, or give us a call for a free consultation! There's no obligation to move forward, and there are never any upfront fees.

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