A lot of folks believe that the main purpose of a mortgage refinance is to reduce your monthly payment. While it’s true that many people choose to refinance when interest rates dip below their current rate, the primary reason behind refinancing is actually to save money by combining your debts. Let me explain further: Imagine you’re dealing with credit card debt that keeps growing due to high interest rates of 15-30%. However, if you happen to have equity in your home, there’s a good chance you can refinance and obtain some cash to pay off those high-interest debts. This smart move can free up more money in your pocket each month, giving you some financial breathing room.
What is a debt consolidation refinance?
Ever heard of a debt consolidation refinance? Well, let me break it down for you. When you refinance your mortgage, you essentially get a new home loan with a lower interest rate, a shorter term, or both. But a debt consolidation or cash-out refinance takes it a step further. It allows you to refinance your mortgage for more than what you currently owe and borrow against the equity in your home to get some cash in hand. And guess what? You can use that cash to pay off those pesky debts with high interest rates—like credit cards, medical bills, or student loans. It’s like a smart financial swap, where you transfer your higher interest debt into your mortgage.
How does debt consolidation work?
So, here’s how it works. Let’s talk about equity. Equity is the magical difference between what you owe on your mortgage and the value of your home. When home values rise, you can gain equity in your humble abode. A debt consolidation refinance or cash-out refinance lets you tap into that hard-earned equity and access some cash to bid farewell to your debts.
Now, imagine this scenario: You purchased a house for $200,000 with a loan of $180,000. Fast forward five years, and you’ve managed to reduce your mortgage balance to $160,000. Meanwhile, your home’s value has skyrocketed, and it’s now worth $300,000. That means you’ve got an impressive $140,000 in equity to play with. Most lenders allow you to access up to around 80% of that equity, depending on your specific situation. So, when you go for a refinance and cash-out, your equity comes to the rescue—it’s used to pay off those other pesky debts, or you can even pocket some of that cash and use it as you please.
Picture this: You receive a check for the exact amount you choose to take out of your equity. The available borrowing amount varies depending on each borrower’s unique circumstances. Exciting, isn’t it?
What is the benefit of debt consolidation with home equity?
So, you may be wondering, what’s the benefit of using home equity for debt consolidation? Well, let me break it down for you. Current mortgage rates have been holding steady at around 5-7%, making mortgages one of the most cost-effective ways to borrow money. Now, compare that to the staggering interest rates of 18-29% on credit card debt. By paying off your high-interest credit card debt with a lower interest loan secured by your home equity, you can save a significant amount of money and simplify your bills. Plus, mortgage payments remain the same over time, unlike credit card bills that can vary and compound depending on how much you choose to pay each month.
The real benefit here is that you’ll be paying lower interest on your monthly mortgage payment and consolidating your bills with high interest into one more affordable and manageable loan. It’s important to note that this doesn’t make your debt disappear—it’s still something you’ll need to repay. However, with the lower interest rate of 5-7% compared to the typical credit card rates of 18-35%, you’ll save money and improve your monthly cash flow by reducing those extra bills. Oh, and here’s a little perk: mortgage interest is often tax-deductible, unlike other consumer debt.*
Where do I get a debt consolidation loan?
While many lenders offer debt consolidation refinancing, Treadstone Funding has an impressive track record of working closely with homeowners to craft the best options for their unique financial situations. Our Loan Officers are no ordinary “bank tellers”— they’re seasoned mortgage experts with a wealth of experience.
If you think a debt consolidation refinance could be the solution you’ve been looking for, don’t hesitate to reach out to one of our knowledgeable Loan Officers or apply for a loan with us today! We’re here to help you make the most informed decisions about your financial future.