Mortgage refinancing can be a great option for many homeowners in several ways; from giving individuals the chance to change their loan term, to helping them to reduce their interest rates. Many choose to refinance their mortgage to turn their home’s equity into cash – and if you’re struggling with debt, refinancing your mortgage and getting that extra money may not be a bad idea.
How to consolidate debt by refinancing your mortgage
Unfortunately, countless people across the U.S find themselves facing debt – and this problem can be made even worse for those who also have to deal with other costly expenses, like a mortgage. Fortunately though, many find that refinancing their home loan can help them to consolidate their debt, or at least help to reduce it.
In the past few years, mortgage rates have been considerably low, which is a great bonus for both those getting new mortgages and existing homeowners. Often, you’ll have the opportunity to refinance to a lower rate, which could help to reduce your monthly repayments.
One way to ensure lower monthly payments is to increase your loan’s term. By refinancing to a mortgage with a longer duration, the remaining value of your home will be spread throughout the new length of your replacement loan – which can often be considerably more than the length of the original.
If lowering your payment as much as possible is your main priority, picking a 30 year fixed rate refinance might be the ideal option for your needs.
However, if you’ve already been paying off your home loan for a number of years, you may not want to extend your mortgage term by this amount. In these instances, going for a shorter loan can be a more attractive solution – and while this can often still help to reduce your interest rates, you may be looking towards a higher monthly repayment plan.
How cash out refinancing could help
Not only can you put the extra cash you save monthly toward paying off your debts, but you could also opt for a cash out refinance loan to help you even more. With this kind of refinancing option, you’ll often be able to turn your home’s equity into cash – and this money could greatly benefit you in your goal to consolidate your debts.
Often, it’s important to make sure that you have enough equity in your home. Generally, it’s important to make sure that your LTV ratio (loan to value ratio) is no more than 80% before refinancing, as this could leave you with the additional expense of private mortgage insurance, which is often abbreviated to PMI.
This kind of insurance can often come to at least 1%of your loan’s value annually – which can potentially add quite a lot to your monthly payments. You can often get an idea of how much your LTV ratio is by working out the difference between your current mortgage amount, and an estimation of your home’s value.
If you don’t have to worry about your loan to value ration being too high, going for a cash out refinance mortgage may be the best course of action for you.
Downsides of choosing cash out refinance
While cash out refinancing can often is a great option for those who hope to pay off their debts, there are a few things that you should consider before you decide to apply for a replacement loan of this kind.
For example, when getting this type of refinance, you’ll be raising your home loan’s balance by the amount of cash that you’ll be taking out to consolidate your debt – which might increase your monthly payments and the overall interest of your mortgage (although this can depend on a few things, such as the amount you take out, the terms, and the interest rate that you qualify for).