Is Refinancing Your Mortgage Consolidation Debt Consolidation A Good Thing?
If you have a lot of high-yield debt to pay off every month,
The cost can quickly become overwhelming. For some, the best way out of this
Situation is debt consolidation.
involves paying off all of your high interest debt with one low interest loan
Save interest payments.
With mortgage rates low today, a debt consolidation refinance or a home loan can be a great way to save money.
However, it is important to understand what is associated with these strategies – the benefits as well as the potential pitfalls. Securing high-interest debt against your home can be risky. So weigh all the pros and cons before making a decision.
Review your refinancing options (January 15, 2021)
In this article (jump to …)
How Debt Consolidation Works
Debt consolidation is meant
to make paying off your debt month to month more affordable. But
How does it work?
John Sweeney, Head of Wealth and Asset Management at Figure, said, “The goal is to pay off higher interest debt with a lower interest source of credit. And, in general, it is good advice to pay as little interest on your debts as possible. "
High-yield debt usually comes from unsecured credit sources such as credit cards and personal loans. “Unsecured” means that if you default on the debt, the lender has no collateral to cover losses. (As opposed to a mortgage that is "secured" by your home.)
It's easy to get over your head with multiple high-yield payments going to different lenders each month.
Consolidating your debt by converting your outstanding balance into a lower interest mortgage can make things easier and save you a lot of money.
"Debt consolidation is worthwhile when you have stable and predictable income and want to make your monthly payments more affordable," said Michael Bovee, debt expert and co-founder of Resolve.
What is a Debt Consolidation Refinance?
The goal of all guilt
The consolidation strategy is to lower your monthly costs. And Sweeney points out
The most affordable source of money for most homeowners is their primary mortgage.
At today's low mortgage
You could possibly pay off credit card debt with one rate
annual percentage of 18-25% when using a mortgage loan
Interest below 4%.
How does it work?
Homeowners looking to consolidate debt often use payout refinancing. This involves taking out a new home loan that is worth more than your current mortgage balance. The “additional” loan amount is paid out upon completion.
You use the disbursed funds to
Pay off existing high interest debt so that you have a remaining debt to pay
from: your mortgage. This is how you effectively pay off.
unsecured debt through a lower interest mortgage loan.
Funds from a withdrawal refinancing can also be used to pay off other important obligations such as student loans or medical bills.
However, if your goal is to get out of debt faster, high-yield debt should take precedence. The money you save can later be used to pay down the principal on lower-interest debts such as student loans.
And there is an added benefit.
Mortgage rates today are near historic lows. So there is a good one
You can lower your current mortgage rate and save on home loan rates as a chance
as well as the interest on your other debts.
Remember that refinancing
comes with closing costs, just like yours
original mortgage did. These often make up 2-5% of the new ones
Loan Amount – So look for an interest rate that is low enough to do this
Make up for the up-front costs and save your external interest at the same time
Review Your Withdrawal Refinancing Rates (Jan 15, 2021)
Refinance Debt Consolidation
If you want to consolidate debt
For mortgage refinancing, you must qualify for the new loan. requirement
vary depending on your current loan type and the type of disbursement refinancing
First, you need enough equity to pay
from the existing debt.
You usually need a lot
more than 20% equity to qualify for a debt consolidation mortgage. This is
because most lenders want you to leave at least 20% of your home equity
unaffected when using a withdrawal refinancing.
For example, 30-40% equity is required
Get 10-20% in cash.
You also need to meet the minimum
Credit score requirements. Conventional withdrawal refinancing – the most common
Type – requires a credit score of at least 620.
FHA also has a withdrawal refinancing facility
Program that allows a FICO score lower than 600. Note, however, that removing a
With a new FHA loan, you pay for Mortgage Insurance Premium (MIP), including
both an upfront fee and a monthly mortgage insurance fee. This increases the
Total cost of your new loan and eat into your savings margin.
For qualified veterans and service members, another option is to consolidate the debt through VA disbursement refinance.
Unlike other refi programs, the VA disbursement loan allows you to refinance 100% of the value of your home. Veterans may also qualify if they do not have enough equity to take out a traditional payoff loan.
Check your Withdrawal Refinancing Eligibility (January 15, 2021).
Other loan options for debt consolidation
Another way to use your home equity and pay off debts is with a home loan or line of credit (HELOC).
A HELOC acts as a revolving credit line with an adjustable interest rate (often based on the base rate) plus a margin. It's like a credit card secured against your home – you only borrow what you need when you need it and don't start repaying until there is a balance due.
With a fixed rate home
With an equity loan, you receive a lump sum when you take out an equity loan with which you can repay your loan
Both HELOCs and at home
Equity loans may have acquisition costs and / or origination fees.
“A HELOC is great
Option if your primary mortgage is already at a competitive rate or you cannot
Are you currently qualifying for a new mortgage, ”Sweeney says.
In other words, if the time is not a good time for you to refinance, HELOCs and home equity loans offer yet another way to get lower interest rates by securing your debt against your home.
Personal loans ("Debt Consolidation Loans")
A debt consolidation loan
works differently than debt consolidation refinance.
“It's usually a
unsecured personal loan with fixed terms of payment that is used for amortization
high-yield debt, ”explains Bovee.
“Your interest rate on
This loan is likely to be considerably lower than credit card charges.
But it's probably not as low as a debt consolidation refinance or HELOC
be, ”he notes.
Bovee adds that debt consolidation for personal loans is a better option if you don't own a home or don't have enough equity to borrow.
Pros and cons of a debt
Debt consolidation can be a smart way to go
get out of debt faster. But if you slip after getting a mortgage
Refinancing the potential risks are high.
The obvious benefit of guilt
With consolidation refinancing, you save money by lowering the interest rate
on your outstanding debt. This could save you a lot of money
"Let's say you had four or five credit cards with interest rates in the 18-25% range that were at or near your credit limit," says Bruce Ailion, broker and real estate attorney. “Suppose you also make minimum monthly payments. Not only will you likely never pay them off. You will also pay a lot of interest. "
Now imagine that you are
consolidated all of this debt into one loan with an annual percentage below 4%.
“You would save a lot
Money. The savings you get by paying less interest could actually be
applied to the (loan) capital. That means you can cash that out
All the debt faster, ”adds Ailion.
Consolidating your debt can also improve your credit score. This helps by lowering your "credit utilization". This is the percentage of your total credit limit that you are using at any given point in time.
Generally the lower one
The better your FICO score, the better your degree of utilization.
It might sound like paying off high yield credit cards with a low interest rate mortgage refinance
not a tough nut to crack. However, there are some very real pitfalls to watch out for.
Debt consolidation strategies have a high default rate. And credit experts say that many who use home equity to pay off credit cards will then turn their cards back on – until they're in even worse shape than they were when they started.
Remember, “As opposed to unsecured credit cards or personal loans
Debt, mortgage debt is secured (against your home), ”warns Ailion.
"That means you are
Pledging your equity as collateral for the money you borrow. When you happen
Arrears and filing for bankruptcy are debts that have previously been paid off
now secured by your equity. "
In the worst case
A homeowner could refinance their debt and then borrow as much as they can
stop making monthly mortgage payments. You could face foreclosure and
eventually lose their home.
It is also important,
Remember, a mortgage refinance involves resetting your loan term. If you
If you were 10 years in a 30 year mortgage at the time of refinancing, your remaining
The term would be reset from 20 to 30 years.
This means that it will be you
Interest payment over a longer period. So despite short-term savings
You could end up paying more on your higher-interest debt when all is said and done
Overall a fault
Consolidation refinancing can be a smart way to pay off debt at a much lower rate
Interest rate. However, it requires a great deal of discipline when paying
Avoid negative consequences.
Remember, you still owe the money
With any kind of debt
Consolidation loan The borrower should exercise caution and be extreme
disciplined with repayment. This is especially true for
a mortgage or a home loan that could put your home at risk, though
You cannot make payments.
Borrowers sometimes step in
Trouble because when debts are consolidated, theirs
prior credit lines are usually released. It is possible to charge
these lines to the maximum and again be in debt problems.
Remember, consolidation does not mean that your debt has been "paid off". They are only being restructured to be more manageable. The real goal is to be debt free. Refinancing or a loan is just a means to this end.
Your next steps
Debt Consolidation Can Be A
Legitimate Path To Debt Free For Careful Borrowers. But you
need to be aware of the possible pitfalls in advance in order to
to avoid them and successfully pay off debts.
Seek help in controlling spending. Make a payment that is above the credit card minimum. Consider interest free bank transfers or personal loans as alternatives
Start by comparing the mortgage
Refinance rates from some lenders to learn how much you can potentially save
by paying off your debts at a lower interest rate.
Check your new plan (January 15, 2021)