When home values rise and rates fall, you can take advantage
It’s the perfect storm for homeowners who want a little financial flexibility while remaining in their homes—that occasions when home values spend months shooting up while rates spend months dropping down. At this point, one of the best ways to take advantage of the market is to refinance a mortgage and consolidate debt, freeing up money for other things.
A cash-out refinance
While a typical mortgage refinance alters the rate and term of your mortgage, a cash-out refinance increases the actual amount borrowed. You are then able to pay off your existing mortgage entirely (and thus can continue paying your mortgage off to your new creditor at the same rate-and-term or an altered one) while receiving a lump cash sum for the increased amount borrowed. Hence the name, “cash-out refinance.”
By using the cash from your cash-out refinance to consolidate your existing debts, you are essentially transferring all your debt into one place: your mortgage. A debt consolidation refinance gets rid of differing due dates and various companies you owe by putting all your loans and debt into one easy payment.
The benefits don’t stop there, however. The interest rates on mortgages are generally substantially lower than credit cards, so by paying off a higher mortgage rather than credit card debt, you are saving potentially hundreds of dollars each month.1
However, it’s important to know that your ability to undergo a cash-out refinance depends greatly on your home equity. You generally need at least 20% equity in the property in order to be eligible to qualify for a cash-out refinance.
How much equity do you have?
Home equity is the difference between how much your home is worth and how much you still owe on your mortgage. Let’s say you bought a home for $200,000 with a down payment option of $20,000. Five years down the road, you’ve paid off $13,000 of your mortgage and owe $167,000 while your home’s value has increased to $220,000. To determine your equity, take your home’s current value ($220,000) and subtract the amount that’s still owed ($167,000) – in this case, your home equity would be $53,000.
Then, divide $53,000 by the $220,000 value and you have over 24% home equity, which could make you eligible to qualify for a cash-out refinance (speak to your licensed Loan Officer to confirm).1
What to consider when consolidating debt
Even after securing a debt consolidation loan, it’s important to keep in mind that your debt isn’t gone—it’s just in a new place. You need to remain disciplined in your spending and not overspend on your now “balance-free” credit cards.
Another thing to consider is that it is almost never a good idea to secure a cash-out refinance at an interest rate that’s higher than the one you’re paying right now. If you find that is not possible, then there are other options you may want to consider, such as home equity loans or a home equity line of credit (HELOC).
Also, make sure you’ll be able to afford the new payments on your new mortgage. When undergoing a cash-out refinance, the balance of your mortgage increases by the amount of debt that you are paying off. As a result, your monthly mortgage payment may wind up increasing, depending on the terms you qualify for as well as the rate of interest. To see how much you can afford, check out our mortgage calculator.
To see if debt consolidation refinancing and cash-out refinancing is right for you, be sure to talk to one of our home loan experts.2
1Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate, Inc. for current rates. Restrictions apply.
2Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.