Debt Consolidation: Mortgage Refinance Options and FAQs About Refinancing to Consolidate Debt

Debt Consolidation: Mortgage Refinance Options and FAQs About Refinancing to Consolidate Debt

Many homeowners refinance their mortgages to lower their interest rates or reduce their monthly payments. Others refinance in order to tap into the equity they’ve built and turn that equity into cash they can use.

Another option that has been a life-saver for many homeowners involves a consolidation of other debts. That is, incorporating other debts like credit cards, personal loans, and auto loans, with your existing mortgage into a new mortgage loan. All of those monthly payments are rolled into one.

Not only can you usually reduce other high-interest accounts into a lower rate mortgage loan, but the incorporation of all those short term accounts into a longer term mortgage can produce sudden and dramatic reductions in your monthly debt payments — leading to very immediate relief.

Would you like to learn more about consolidating your debts with a mortgage refinance? Here’s what you need to know first.

How debt consolidation via mortgage refinance works

Easing the monthly burden

Debts are a lot like weeds. While you aren’t paying attention, they seem to keep growing, until one day you look down, and can’t see your ankles anymore. Debt, especially credit card debt will just continue to multiply until we find it more and more difficult to make the monthly payments anymore. Or find we can only afford the minimum.

One answer to that situation is to combine those other balances and pay them off with a debt consolidation mortgage refinance. It will provide you with a new mortgage loan with a higher balance, and a payment higher than your old mortgage loan. But it will also erase the multiple monthly payments for all those loans you are consolidating, leaving you with just the one new mortgage payment.

The result of that will be, in some cases, monthly savings in the hundreds, even thousands of dollars. Of course, the impact of debt consolidation will be unique in each case, differing from one borrower to the next.

Reducing interest burden

You’ve seen the recent headlines. Mortgage rates are at historic lows right now, while property values are near all-time highs. This means it will be very likely that you will have the optimum conditions for using the available equity in your property to pay off loans and credit cards with higher rates of interest.

And the process is pretty much the same as any other mortgage loan.

  1. Refinance your current mortgage into a larger-sized one via a cash-out refinance. Just take your current balance, add in the balances of your higher-interest debts, and that’s how much you should aim to take out to consolidate your debts.
  2. Once you close on your loan, instruct your lender to pay off those other balances on your behalf. Once you pay off those other balances in full, then the only monthly debt left will be your new mortgage payment.
  3. Pay your mortgage monthly, just as you did before. The new mortgage payment will likely be higher than the old one, but your total debt service could be very much improved.

Other reasons why a debt consolidation mortgage might be a good choice

In addition to reducing your monthly debt service, and the potential for reducing the interest rates of your other debts, there are other reasons why a debt consolidation refinance can work for you.

1. Taxes

Mortgage loans come with a unique tax benefit you won’t find with other types of debts: the interest is usually deductible from your annual tax returns. As long as you itemize deductions on your returns, you can write off some or all of the interest you pay each year on your mortgage. But everyone’s circumstances are unique, and to determine how much of a benefit this could be for you, it is best to consult a tax professional who can give you prudent tax advice.

2. Credit scores

Everyone seems to be attentive to their credit scores these days, and many seem to want to protect their scores from going down. Some things that cause credit scores to go down are using too much credit, having too many high balances, or pyramiding monthly payments. A debt consolidation loan can potentially relieve all of these factors, and as a result, eliminate some of the things that can drag down your credit scores.

Since credit scores are often used when determining interest rates, this could have trickle-down benefits and result in savings later on. It will also help you qualify for lower interest rates should you take out a loan or other financing product down the line.

Debt consolidation mortgage refinance FAQ

The idea of consolidating your debts using a mortgage loan is likely a little confusing — and that’s common. To help you better understand how the process works and how it might help your financial situation, we’ve gathered the most commonly asked questions below.

Am I eligible to consolidate my debts using a mortgage refinance?

To refinance your mortgage, you’ll typically need a decent credit score and a debt-to-income ratio of around 43% or less (including your new mortgage payment). And, you will need to have the available equity that will allow you to increase your mortgage loan balance. At the end of it all, you will need to have at least 20% equity in your home. These requirements all vary by lender and loan program, though, so talk to a loan officer about the exact eligibility standards you’ll need to qualify.

How much does a debt consolidation mortgage cost?

A refinance for debt consolidation is like any other mortgage, in that it comes with closing costs and fees, just like your initial loan did. These typically amount to somewhere between 2% and 5% of your loan balance, though it varies by lender. Remember that a lender is required to provide you with a loan estimate within three days of receiving your application, which will give you a full picture of the fees the lender expects you to face.

Are there any risks to consolidating my debts via refinance?

All mortgages have risk, just like any debt you take on.

A mortgage is a secured loan, which means that there will be a lien attached to your home. And if you don’t pay your debts, you could face losing your home. So, a debt consolidation mortgage is like every other mortgage in that respect.

While you might see really helpful monthly savings as a result of a debt consolidation, the interest that you pay over the life of the loan will almost certainly be higher. The mortgage term is longer, which leads to that conclusion.

Will my home have to be appraised when I’m consolidating my debt?

Very likely, yes. Some mortgage loans today will qualify for an appraisal waiver, but that is much less likely in a debt consolidation scenario. An appraisal will be needed to ensure the home’s value leaves enough equity to support the full amount being borrowed.

If the appraisal is lower than expected, it may impact how much cash you’re able to take out using the refinance. In some cases, it may make you ineligible for a cash-out refinance altogether. (You need a certain amount of equity in the home in order to qualify.)

How much can I take out with a cash-out refinance for debt consolidation?

In most cases, you can borrow 80% of your home’s value with a cash-out refinance. Sometimes, even a little more. But the only way to determine how much would be to speak with a loan officer who can guide you on that subject.

Considering consolidating your debts?

Have more questions? Still feeling confused? Just want to know if you’re eligible to consolidate your debts via a mortgage refinance? Then reach out to an Embrace Home Loans team member today. They can walk you through your options and answer any questions you might have.

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