If you are a homeowner who is looking for the best way to achieve bill consolidation, there are a few different options for obtaining cash through the equity in your home. The first is through a home equity line of credit and the second is through cash out refinancing. The balance of this article will explain with the details of the latter option.
What is cash out refinancing?
With cash out refinancing, you obtain another mortgage on your home that is greater than the amount you currently owe. The funds from the new mortgage are used to pay off the existing mortgage in full, and you are free to use the remainder of the balance for your own purposes.
For example, if you owe $100,000 on your home, but need cash to pay for medical bills or a major home improvement project, you may decide to pursue cash out refinancing loan for $125,000 and use the remaining $25,000 for those reasons. You should keep in mind that you will be paying interest on the $25,000 for several years to come, so make sure the money is not spent frivolously.
Benefits of cash out refinance when used to consolidate debt
If the purpose of obtaining funds through the equity in your home is to pay off several debts, there are two major advantages to this. First, you get rid of all your other debts by combining them into one payment. Credit cards are notorious for charging high interest rates, so you will definitely be saving there. Second, the interest you pay on your mortgage is tax-deductible, whereas the interest you pay on credit cards is not.
How does a cash out refinance differ from a home equity loan?
Although these two loan terms are often used interchangeably, there are distinct differences between them. A cash out refinance is intended to replace your primary mortgage, whereas a home equity loan is a second loan that is added to it. Also, with cash out refinance, you will likely pay a higher rate of interest and have closing costs added to your loan. Neither of these situations applies to a home equity loan. If you already have a favorable interest rate on your primary mortgage, you could risk being stuck with a higher rate if you refinance. A home equity loan would be the better choice in this situation.
How do I decide if cash out refinancing is the right option for me?
You need to evaluate your financial situation carefully by looking toward the future in addition to the present benefits you could realize with cash out refinancing. Do the math and see which scenario makes the most sense to you. If you choose cash out refinance, you may be able to get a lower interest rate, but will have a higher payment since you are adding to the balance of your loan. Figure out how much you would save in interest over the course of the new loan and compare that to the additional amount which has been added to your monthly payment.