You are not alone if your debt feels unmanageable. According to a December 2018 article printed by personal finance site Nerd Wallet, the typical American owes over $135,000 in combined debt when including their mortgage loan. Other sources of debt include nearly $7,000 on a revolving credit card, approximately $184,000 for mortgage loans, $28,000 for car loans, and almost $48,000 for student loans.
Most of these debts come with a high interest rate as well. The same article indicates that people pay an average of $1,100 each year in credit card interest alone. If you own a home and are looking for a way to reduce debt, you may wish to consider refinancing your mortgage to consolidate debt.
How Does a Mortgage Refinance Work?
Refinancing your mortgage to consolidate debt means that you borrow against the equity in your home to obtain a lower interest rate for your existing debts. When you consider that some credit cards charge interest as high as 30 percent and some mortgage lenders only charge interest in the low single digits, refinancing can make an excellent alternative in some situations.
The term “equity” refers to the difference between the original sale price of your home and what you still owe on it. For example, you would have equity of $50,000 if you took out a 30-year-mortgage for $200,000 that has a current balance of $150,000. The amount of equity you have built in your home is the maximum you can borrow for debt consolidation purposes. This enables you to make one predictable payment each month towards your mortgage and the debt you choose to refinance rather than deal with fluctuating payment amounts on your credit cards.
Aim for a Loan-to-Value Amount Below 80 Percent
When a borrower owes more than 80 percent on a mortgage loan, he or she must pay private mortgage insurance (PMI) as part of the loan payment. Refinancing might not be the best option if the new loan would put you above the 80 percent loan-to-value (LTV) range. This is especially true if your current loan-to-value is under 80 percent and the refinance would put it above that amount.
The easiest way to calculate your LTV is to divide the current balance of your mortgage by the last appraised value of your home. You would then add the amount of debt you would like to include in your refinancing loan, add it to the current balance of your mortgage, and divide it by your home’s appraised value to come up with your new LTV.
People who have the most success with refinancing mortgage to consolidate debt are committed to not incurring more debt since that would defeat the purpose of obtaining the new loan in the first place. While you may not be able to avoid certain types of debt such as healthcare costs, avoid the temptation to open new credit card accounts or continue using the ones you paid off with proceeds from your home refinance loan. It is also a good idea to create a plan for how you will spend the proceeds from your home equity loan before you sign the closing papers.
The Process of Refinancing Mortgage to Consolidate Debt
You will go through many of the same procedures to obtain your refinancing loan that you did to get the original mortgage on the loan. This includes completing an in-depth application and providing proof of the information you list. You should plan to gather your most recent paystubs, bank statements, and tax returns to help expedite the process. The mortgage lender will obtain your credit report and verify your employment. You will also need to pay several fees towards the closing costs when you sign paperwork for your new mortgage loan.
BrightPath Can Help with Your Debt Consolidation Plan
If you have reviewed your debt consolidation options and determined that refinancing your mortgage offers the most benefits, the first thing you need to do is complete our loan application form. Once we receive your completed application, we will assign you to a loan officer who will assist you with the rest of the process.
Feel free to contact us at 1-888-222-6003 with additional questions about refinancing your mortgage. We look forward to helping you!