Being in debt can be stressful for anybody, regardless of the type of debt and how high it is. Unless you have enough money set aside to pay for everything, the chances are good you’re carrying at least some debt and are wondering the best way to eliminate it.
At Addition Financial, we often talk to our members about debt and how to manage it, including details about debt repayment strategies. Homeowners ask about refinancing to consolidate debt and that’s something that may be worth considering. With that in mind, here are five benefits of refinancing your existing home loan to consolidate debt.
If you’re handling your existing debt with minimal stress, then consolidating debt may not be the right solution for you. However, if you have experienced one or more of the following things, then it could be a sign that debt consolidation is the best way to reduce stress and get out of debt as quickly as possible:
If you’ve experienced any of these things, then it may be a good idea to consider debt consolidation as a way to pay down your debt and improve your financial situation.
Now, let’s look at some of the reasons why refinancing your mortgage is a good idea. You won’t do yourself any good if your refinancing puts you in a financially precarious position, so here are some of the signs that refinancing could be a good idea:
If debt refinancing makes sense for you based on the criteria above, then it may make sense to use your home equity to consolidate and pay down your debt. You can use our free calculator to determine whether you can save money with refinancing.
Now let’s talk about how refinancing a home loan to consolidate debt works. Home refinancing can be a simple process that involves lowering your interest rate and monthly payments without using the equity in your home. However, debt consolidation requires cash-out refinancing to get the money to pay your debts.
The process of refinancing to consolidate debt has a couple of important differences from typical refinancing. Here are the usual steps you would follow to refinance:
The first thing that’s different with a debt consolidation refinance is that you will need to calculate your home equity before you apply to make sure you have enough equity to qualify for a cash-out refinance and that the equity you have will be sufficient to pay your debts.
The second difference is that you will receive money at your closing, typically as an electronic transfer, that you will use to pay off your debts. If you don’t receive enough funds to pay everything, you may want to pay the balances with the highest interest rates first and work your way down from there.
There are many benefits of refinancing a home loan to consolidate debt. Here are five to consider.
Refinancing your home loan can help reduce your monthly mortgage payment and remove some of the financial pressure you may be feeling. As we noted above, it only makes sense to refinance to consolidate debt if you can qualify for a lower interest rate.
Not only can your lower monthly payment remove monthly stress, it can also lead to paying significantly less in interest over the term of your loan.
When you use the cash from your home equity to pay off your debts, you’ll save money on those payments as well. Many credit cards come with high interest rates that can add up over time, and paying the reduced interest on your refinanced mortgage can help you save.
You’ll be making a monthly payment that will be lower, too, which means you’ll have more money to use for other expenses or to build up an emergency fund.
We already mentioned that making multiple debt payments each month can be stressful and time-consuming. You may feel that you need to juggle payments, particularly if they all come due at around the same time each month.
When you use refinancing to consolidate debt, you’ll eliminate those multiple payments and make just one payment (assuming you get enough money from your refinancing to pay off all your debt.) That means you’ll make one payment each month and won’t have to worry about having enough money to pay everything.
One benefit of paying down debt that doesn’t get enough attention is the possibility of improving your credit score. Refinancing gives you the option to pay all your debt at once, thus eliminating the possibility of late payments.
On a related note, your debt utilization plays a significant role in determining your FICO score. When you pay down debt, you may also reduce your total debt, particularly if you qualify for a lower interest rate. With a lower amount outstanding, you may see a rapid improvement in your credit score.
There’s no denying that carrying a lot of debt — and juggling funds to repay it — can take a toll on people, causing intense stress and anxiety about money. There’s plenty of evidence to suggest that stress can contribute to health issues such as depression and even heart disease.
People who have a lot of debt can reduce their stress by refinancing a home loan to consolidate their debt with lower monthly payments.
It is important to keep in mind that you’ll be responsible for closing costs for your new loan, so make sure to calculate those and take them into account before you refinance.
You should be aware that you’ll be using your home and home equity as collateral, so making your monthly payments on time is essential to avoid foreclosure. In many cases, you will have a single monthly payment that will be lower than what you were paying prior to refinancing.
If you are juggling multiple debt repayments every month and worried that high interest rates will affect your financial status for the foreseeable future, refinancing your home loan to consolidate your debts might be the right choice for you. The 5 benefits of refinancing to consolidate debt we’ve listed here can help you make that decision.
Are you considering a debt consolidation loan to reduce your monthly payments and save money? Addition Financial can help! Click here to read about our mortgage refinancing options and start the application process today.