How To Use Cash-Out Refinance To Pay Off Your Debts
Millions of Americans live with debt, which often saddles them with high interest rates, multiple monthly payments, and the stress and worry of being under financial pressure. One of the most powerful ways to get out from underneath significant debt is to use cash-out refinancing to accomplish significant debt consolidation.
There are some different reasons why someone would want to refinance, as well as different methods of accomplishing it. We’re going to look at how cash-out refinance works, and how it can help you pay your debt down significantly, or even pay it off entirely.
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First Determine If Refinancing Will Be Ideal
Before you even begin, it would be prudent to see if refinancing will end up saving you money at all. There is a huge benefit to borrowing funds by using a mortgage since they generally have much lower interest rates than credit cards or private loans. This means if you have lots of high-interest debt, a mortgage could help you pay that off, and while you may still have the same amount of debt overall, it will be accumulating interest at a far slower rate..
If the interest rates on your debts are not significant enough, then going through the process of cash-out refinancing may not be useful in the end. The most productive way to leverage cash-out refinancing is using it to reduce or altogether eliminate high-interest credit card or even student loan debt. It is also prime for paying off other large debts that may have even a marginally-higher interest rate.
Additionally, since you will only have one mortgage, you will have one payment, so you may be able to eliminate multiple payments to creditors each month, reducing stress overall.
How Cash-Out Refinancing Works
Cash-out refinancing is based on the equity that you have built up in your home. Every time you make a payment on your existing mortgage, you build a small portion of the equity in that property.
Equity is a measure of the percentage of the property you own, as represented by the portion of the principal that has been paid off already. For example, if you have a $250,000 loan that you have paid $50,000 towards you have then built $50,000 in home equity.
How a cash-out refinancing loan works is that you withdraw that equity in cash and the lender performing the cash-out refinance then adds to the principal balance of the loan. This newer loan replaces the old one, and you now have to pay your agreed-upon mortgage payment just like you did on your prior loan.
In other words, if we return to our fictional $250,000 with $50,000 in equity, your old balance would be $200,000. Your new loan of $250,000 would take the place of the old loan, and you would receive $50,000 in cash once the deal closes.
In some cases where you have put in improvements to the property, increasing its value, you may be able to have the home re-appraised during the refinancing application and get even more of the equity in your home as cash.
Applying For Refinancing
The application process for cash-out refinancing is very similar to the original mortgage application process. You will need to apply with your lender, or if they don’t offer cash-out refinancing apply with one that does, and subsequently get an appraisal.
Then you will need to wait while the paperwork is processed and the appraisal is completed and accepted by the lender. Once that process has finished you will be able to close the deal and sign for your new loan, after which the money will be wired to your account.
Be sure that you have enough equity built up to be useful. Many lenders have cutoffs where you cannot withdraw more than 80%-90% of the home’s equity. This can make it challenging if you are nearing the end of your term but need most of the equity.
Using Cash-Out Refinancing To Pay Off Your Debt
While a cash-out refinancing mortgage can be great for paying off large debts or multiple high-interest debts, they aren’t for everyone. Make sure that your debt can be helped by the process, then contact a lender today to begin.