Refinance to Get Out of Debt
Follow these steps to see if cash-out refinancing can help you pay off your creditors, lower your total monthly debt payment and decrease the amount of total interest you pay.
1. Figure out how much debt you have.
Make a list of all your debts and how much interest you are paying on them: car loans (and any other vehicle loans, like a boat or RV), credit cards and retail store credit (like furniture or appliance stores). This will tell you how much debt you need to consolidate.
2. Figure out how much equity you have.
Equity is the difference between the value of your home and how much you owe on your mortgage. For instance, if your home is worth $200,000 and you owe $100,000, you have $100,000 in equity.
3. Figure out how much cash-out refinancing could save you month-to-month.
Use our Debt Consolidation calculator to see if you could save by refinancing. Let’s say your combined debts (not including your current mortgage) equal $25,000. You have $75,000 in equity and you owe $150,000 on your mortgage. You would calculate a new mortgage payment on a loan for $175,000 at current interest rates.
4. Apply for your new mortgage.
All the rules that applied when you got your first mortgage to buy your home still apply when you get a cash-out refinance for debt consolidation. Do your homework, understand the type of mortgage you are getting, what your monthly payment will be (including how it might change over time) and any fees and closing costs.
5. Pay off your debt.
Deposit that check from your lender and turn right around and write checks to your creditors. Do this as soon as you can, so you don’t get used to seeing that big balance in your account.
6. Stay out of debt.
Cash-out refinancing can be a smart way of getting out of debt. But the likely benefits - a lower monthly payment, a lower interest rate, tax-deductible interest payments – are nullified if all you do is run up more debt. So cut up your credit cards and resist making purchases you can’t pay for with cash. If you get in over your head and can’t afford to make your home loan payments, you could end up losing your house.
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