Should you refinance your mortgage to consolidate debt?
If you're feeling the weight of outstanding debt, you're not alone. Experian reported that Americans held $756 billion in outstanding credit card debt as of the third quarter of 2020.
One method to break out of debt more quickly is to consolidate your debt, which is essentially combining multiple debts into one larger debt, usually at a lower interest rate. Debt consolidation may help lower your total monthly payments and possibly pay off your debt faster. It doesn't lower the amount of money you currently owe, but simplifies your bills into a single payment and could save you money in interest. If you have a lot of debt at high interest rates, consolidating your debt into one loan at a lower interest rate may work well for your situation.
There are many factors to consider when deciding if, when, and how to consolidate your debts, including your credit score, the interest rate environment, the years remaining on your mortgage, and more. As a homeowner, your mortgage can be a helpful tool to achieve your financial goals. Homepoint can help you tap into your home's equity through a couple of ways:
HELOCs and home equity loans: HELOCs (home equity line of credit) and home equity loans allow homeowners to borrow against the equity of their home. These can work well as tools for homeowners who require cash quickly, as they typically offer a competitive interest rate and the freedom to choose how the money is used. However, you may pay more in upfront fees and defaulting on your loan could result in foreclosure.
Cash-out refinance: A cash-out refinance replaces your existing loan and provides you a check at closing. The value of that check, as well as any closing costs associated with your new home loan, are added to the sum of your new home loan. If you own your home and have outstanding debts at higher interest rates, a cash-out refinance may be a great option to consider as mortgage rates are typically much lower than interest rates on other unsecured debts.
A cash-out refinance is often a good option for homeowners looking to consolidate debt because it allows them to pay off higher-interest debt using a lower-interest loan. Your mortgage is secured debt, backed by your home as collateral, and carries a lower risk to lenders. Because of this factor, mortgage rates are typically lower than those of unsecured debt, like credit cards.
While there are other ways to consolidate your debt, like a balance transfer credit card or a personal loan, another benefit to utilizing your home loan is that mortgage interest may be tax deductible*, while interest paid on personal loans, car loans, and credit cards is generally not. This possible advantage means it may make even more sense for homeowners to use a refinance for debt consolidation.
Consolidating debt could make it easier to manage monthly payments and opens the door to possibly lowering interest rates, increasing your credit, and repaying your debt sooner. While consolidating debt helps many people, that does not automatically mean it is the right decision for you as you could end up paying a higher rate than your existing total debt or have to pay more in upfront costs.
Homepoint can help you assess whether a HELOC or refinance could meet your needs and can work with you to tap into your home's equity. Reach out to us today to find out what tools you can use to meet your financial goals.
Talking about your options with a member of our dedicated loan team can help you make the best decision for your situation. Homepoint homeowners can start the conversation by calling us at (833) 580-2197.
* Homepoint is not a licensed financial planner or tax professional. The information provided is for educational purposes only. Please consult a tax or financial planning professional to discuss your specific situation.