Are you debating whether or not to do a cash-out refinance on your home loan? If you’re struggling with high-interest debt, a cash-out refinance might be one option to potentially help alleviate some of your financial troubles. A great way to consolidate high-interest debt is to cash-out some of your home equity. In the following article, find out how a cash-out refinance can help you.
How a Cash-Out Refinance Loan Can Help with Your Debt
As you make your mortgage payments over time, you should start to gain home equity. With each payment, you should own more of your home and owe less on your loan.
Once you start to acquire home equity and have a strong loan-to-value ratio (Hint: The loan-to-value ratio is the ratio of your loan to the value of your home.), you can consider cash-out refinance as a way to deal with your non-mortgage debt such as credit card debt.
By opting for cash-out refinancing, you leverage some money (your home equity) and apply it toward your non-mortgage debt. If your credit card interest rates are high, choosing to pay off that debt sooner rather than later could save you a lot of money in the long run. As long as you’re able to continue to make your mortgage payments after the mortgage has been readjusted by the cash-out refinancing, this could be an ideal way for you to handle your debt.
Two Examples of Cash-Out Refinancing
Interested in learning more about examples where choosing to cash-out refinance mortgage made the most sense financially for individuals?
Adam’s home is valued at $200,000. Over time, he has paid $88,964 of his mortgage. That means he now owns that much of his home. So, his home equity is $88,964, and his loan balance is at $111,035. His non-mortgage debt, more specifically his credit card debt, is $23,634.
By refinancing, Adam paid off his high-interest debt, and he’s now paying $538* less per month.
Here’s another example in which someone cut down her non-mortgage debt through home refinance with cash-out.
Before choosing to cash-out refinance her mortgage, her home equity was $96,268. Her home is valued at $250,000, and she still had to pay $153,732 on her loan. Her credit card debt was at $35,932.
By refinancing, April paid off her high-interest debt, and she’s now paying $562* less per month.
What to Consider with Cash-Out Refinancing and Your Non-Mortgage Debt
Depending on where you live, the value of your house, your credit score, and other variables, the interest rate on your mortgage before and after cash-out refinancing may change, causing your payments per month to decrease, as it did with Adam and April. In addition, if your credit card interest rate is higher than your mortgage interest rate, this may be another reason to consider cash-out refinancing to pay off your non-mortgage credit card debt.
Without home refinance with cash-out, Adam and April would continue to pay off their credit card debt while dealing with high-interest rates. When they both opted to refinance their mortgage loans, they were able to get rid of their credit card debt and avoid dealing with those interest rates. On top of that, their monthly mortgage payments decreased per month, setting them up for a better financial future.