Refinancing to Pay Off Debt

Debt can be overwhelming. If you have high balances on your credit cards, it may feel as though you will never be able to get out of debt, especially with high interest cards. Refinancing is a great way to pay off your debt. You can use the equity in your home to pay off those high interest debts. However, refinancing is an option only if the payment is lower than you are paying now.

A refinance could be for a lower interest rate or to consolidate your bills. If it is to consolidate your bills then your monthly mortgage payment must be lower than the bills you are paying off and the mortgage payment added together. For example, if your mortgage is $1,000 per month and you have credit card bills totaling $500 per month that would total $1,500. If your total payment after the refinance is $1,200 you have saved $300. A lender will evaluate your situation by calculating the ratio of your monthly income to your new payment minus your debts. If the ratio is between 25 and 33 percent, you will probably qualify for the new loan.

If it looks like your bills will be paid off within a three year period without refinancing the house, do not do it. Refinancing should only be done if you are going to come out with a lesser payment, and if you are willing to discipline yourself by breaking the bondage of credit card use.

If you are looking to refinance your whole loan in order to get cash out most lenders want to see at least 75-80 percent loan to value. That means that if your property had an appraisal of $100,000 the lender would give you a loan up to $75,000 or $80,000 depending on the lender. If you use the $75,000 as an example you would then subtract your current balance from $75,000. For example, if the balance of the mortgage was $50,000 and you could borrow $75,000, you will net $25,000 less the cost of your loan.

There are some lenders that will make 100 percent and 125 percent equity loans. These types of loans are harder to qualify for. The risk of getting a 100 percent or 125 percent loan is that you are over encumbering your property. You are taking all the equity out of your property and more. These types of loans are risky because if your property value drops, you will owe more than what the property is worth. It will make it difficult to sell your property.

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