If you have a lot of debt, you may be able to pay it off faster by refinancing your home. Wondering if that process is right for you or how refinancing can help? Here’s an overview of the process.
How Can Refinancing a Home Help Pay Off Debts?
Refinancing a home only helps to pay off debt if you have equity in the home. Equity is when you owe less than the home is worth. For instance, if you only owe $100,000 on your home but your home is worth $250,000, you have $150,000 in equity.
In this situation, if you refinance and take out a $200,000 mortgage, for example, you use the first $100,000 to pay off your existing mortgage and the remaining $100,000 to pay off credit cards, school loans, and any other type of debt you have. Then, you make payments on the $200,000 mortgage as usual.
Does Refinancing a Home Help You Get Out of Debt Sooner?
Generally, consumer debt has very high interest rates. In fact, many credit cards have rates that are 20 percent or higher. Mortgages, in contrast, tend to have much lower interest rates. When you lower the interest rate, you can pay off your debts much faster and save money in the process.
Beyond that, when you consolidate a number of loans together, you only have to make a single monthly payment. That makes it easier to stay on top of your loan. With a single payment, you are less likely to make late payments and face fees, which also helps you to get out of debt faster.
What Are the Best Mortgages for Consolidating Debts?
If you’re thinking about refinancing a home to pay off consumer debt, there are a range of different mortgages to consider. You may want to look into the following options:
- FHA loans are guaranteed by the Federal Housing Administration and have low interest rates
- VA home loans have special offers and low interest rates for veterans
- 15-year fixed rate mortgages help you pay off the mortgage quickly
- 30-year fixed rate mortgages let you enjoy a predictable interest rate for 30 years
- Home equity lines of credit (HELOC) let you turn your equity into a line of credit which you can use to pay down other debts
- Home equity loans are based on your home equity and they exist separately from your main mortgage
- Cash out refinance loans can also help you to pay down debts
There are also other options to suit a range of different financial situations.
How Much Does Refinancing a Home Cost?
Generally, refinancing is designed to save you money, so you need to keep the overall savings in mind as you look at different loan options. However, you often need to pay for an appraisal, and there may be other closing costs with your loan as well. In some cases, you can roll these costs into the mortgage, but you need to double check to ensure you know what to expect when the loan closes.
If you’re interested in refinancing a home to consolidate debts or for any other reason, we can help. Contact BrightPath today to learn more, or start the application process online today.