Refinancing Mortgage to Consolidate Debt the Right Way

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refinancing mortgage to consolidate debt

Tap into Your Home’s Equity to Consolidate Your Debt

Most people carry a little debt, but if you find your debt load is growing, it is smart to be proactive in paying it down. If you are a homeowner, and you’ve got some equity (the amount that you own of your home vs. the amount that you owe against your home) to use, it might make sense to tap into that equity to consolidate your credit cards, lines of credit, and loans. However, since you are leveraging debt against your home asset, there are special considerations to take.

Why Debt Consolidation Works

Did you know that if you are only making minimum payments on your credit cards, it will take an extended period of time to actually pay them off? That’s because much of your minimum payment goes towards paying interest. If you consolidate all of your debts into one payment, more of your payment goes towards reducing your debt principal and not towards interest.

Another benefit is that with a single debt payment, you will increase your household cash flow, which means that you’ll better be able to pay for things in cash and avoid accumulating debt again.

The Benefits of Refinancing Your Mortgage to Pay Down Debt

If you’ve got enough equity built up in your home, you’ve got an opportunity to take that equity out by refinancing your mortgage. You would combine whatever your remaining balance is on your mortgage with whatever your outstanding debts are (e.g., credit cards, personal loans, lines of credit, or other bills). Typically mortgage rates are a great deal cheaper than interest rates you’ll pay on other consumer credit products, like credit cards, so refinancing your mortgage lets you pay down your debt at a lower rate.

Popular Choices for Mortgage Refinance

These are some of the most popular mortgage refinance options available:

  • FHA loan – These mortgages are backed by the Federal Housing Administration (FHA) and offer competitive interest rates.
  • 15-year fixed-rate loan –This is a good choice to pay your debt down quickly
  • 30-year fixed-rate loan – This mortgage lets you budget well for your payments for 30 years
  • VA loan – Mortgages with special benefits available to military personnel and qualified veterans

Ways to Refinance Your Mortgage to Consolidate Debt the Right Way

Although your interest rates will almost always be lower with a mortgage, there may be other costs involved. As the goal in refinancing is to help you save money, make sure that you anticipate all the costs and build them into your budget.

Because you are using your home as collateral, you will likely need to pay for an appraisal. There will be other closing costs as well (e.g., lawyer fees, title & registration fees). Depending on your circumstance, you might even need to pay a penalty for breaking your mortgage contract early. Work with a financial professional that you trust to help you understand all the costs and how to refinance your mortgage to consolidate debt the right way.

For more information on the best strategy to consolidate your debt and refinance your mortgage, call BrightPath today.

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