Category | General
Are you feeling overwhelmed by debt? You’re not alone. In fact, many American households are dealing with credit card debt on top of their mortgages, student loans, car loans, medical bills, and the list goes on.
THE GOOD NEWS
For homeowners, the good news is that you may be able to make the debt you have more manageable by refinancing your mortgage. Why? A refinance can help you consolidate your debt by capitalizing on low mortgage interest rates while tapping into your home’s equity.
HOW CAN A REFINANCE HELP PAY OFF DEBT?
Are you familiar with cash-out refinances? We’ve talked about cash-out refinances in the past, but in case you forgot what it is, a cash-out refinance is a type of mortgage refinance that allows homeowners to consolidate debt. This process allows you to borrow money from the equity you have in your home and use that to pay off other debts like credit cards, student loans, etc. Basically, you are paying off any existing balances by transferring them to your mortgage, placing all balances into one debt. This results in only having to make one mortgage payment.
SHOULD YOU REFINANCE YOUR MORTGAGE TO CONSOLIDATE DEBT?
Reach out to one of our local loan experts to discuss your options. When determining if a cash-out refi is best for you, here are some questions to ask yourself:
1. Do I have enough equity?
You will need to have enough equity to borrow while keeping some remaining in the home. The amount of equity you leave in your home after a refinance is important because it affects your loan-to-value (LTV).
An LTV determines if you need Private Mortgage Insurance (PMI), which can cost hundreds on your monthly mortgage payment. Keep in mind that if your LTV is higher than 80%, you may be required to pay this insurance. To avoid paying for private mortgage insurance, your LTV after you refinance needs to be at 80% or lower. Here’s an example of how you can easily calculate your LTV before you refinance:
Let’s say your home is worth $500,000 and your loan balance is $250,000. Your LTV would be 50%.
Property Value = $500,000
Loan balance = $250,000
250,000/500,000 = 0.50
To figure out how much your LTV would be with a cash-out refinance, simply add the amount of equity you want to borrow to your current loan balance, then divide that by the appraised value of your property. For instance, say you want to borrow 10,000 to pay off your credit card debt, your new loan balance would be $260,000 and your new LTV after your cash-out refinance would be 52%.
Property Value = $500,000
Loan Balance = $250,000
Cash-out amount borrowed = $10,000
New loan balance - $260,000
260,000/500,000 = 0.52
With a 52% LTV, you could do a cash-out refinance with enough equity leftover to avoid PMI.
2. Can I afford a higher monthly mortgage payment?
Refinancing does not get rid of debt. However, it transfers it over to another debt also known as your mortgage. When you refinance your mortgage, your balance increases by the amount of equity you borrowed. It’s important to understand that no matter how much debt you transfer, increasing your mortgage balance will in turn increase your monthly mortgage payment.
3. Does the cost of the mortgage make sense compared to other options?
Do you remember paying closing costs on your original mortgage? Well, you will also need to pay these costs on a mortgage refinance. There may be some additional costs included as well – speak with your loan officer for more details.
If you think a mortgage refinance is right for you, reach out to one of our local loan experts. We will review your current mortgage and see what the next best step is. If you’re ready to get the process started, get a free pre-approval today. This process takes less than 5 minutes and you can do it from your phone! Click here. If you prefer to speak with one of our Loan Officers, we would be happy to help! 732.832.2967. We know this is a big financial decision, and we want to make sure you make the best decision possible.