The Benefits of Cash Out Refinance for Debt Consolidation

No matter how good our intentions are, with the “I Want That!” society we live in, even the most diligent of us sometimes over do on debt, especially on credit cards or other non- appreciable debt in the form of installment loans. One popular and smart way, if done correctly, to wipe the slate clean or at least get a handle on high debt is through the “Cash-out Refinance”.

If you have built up Equity in your house (where the appraised value is larger than the amount currently owed on your Mortgage), you can access that money and put it to work for you. Instead of continuing to pay on those high interest credit cards and never seeming to make a dent in the balance, the cash out can help you “start fresh”, and, depending on your area, your home appreciation could grow faster than your cash out. Some of the benefits of replacing credit card and revolving debt with mortgage debt are:

· Paying off high interest loans (credit cards) with a much lower interest loan, showing less outstanding loans on your credit and a less number of payments at bill time.

· Lowering your monthly net out-go, freeing up cash for everyday expenses or to ad more to the Principle portion of your Mortgage loan. (I’ve know examples of homeowners restructuring their current home loans to pay off debt, saving $500 or more per month, which was applied back to Principle, carving 5 or more years off the length of the Home Loan!)

· Raising credit scores…Mortgage loans are looked at more favorably than credit cards, especially when your balances exceed 50% of the maximum balance allowed. By paying off these loans, credit scores go up naturally.

· Increasing Tax Advantages. Currently you receive no tax benefit for that payment you’re paying on those credit cards; but when that same debt is transferred to a mortgage loan, you receive a tax advantage on interest paid on that loan. For example, let’s say you’re in a 30 % tax bracket. For every $10,000 spent on interest on your home loan in that year, you could receive a $3000 deduction!

These are but a few of the benefits to refinancing for debt recovery. There are some precautions, though, that MUST be recognized or you’ll find yourself deeper in debt. When strategies of this nature are utilized to “pull out of debt”, one must go into such a strategy with just that mindset. If a cash out refinance is handled to clear off credit cards, only to max those cards again, the process can catch up to you. Most lenders view credit reports for just such patterns before approving a loan. Discipline is key. Be careful to follow through on your long term plan to control your debt so it doesn’t control you and your decision to refinance with cash out can be a smart move.

Two Interesting notes:

· If you pay only the minimum payment stated on your revolving credit card, in the average case, it can take up to 20 years or more to pay off the balance of $8000. Most mortgages are refinanced every 5 years or less on average, due to increased home value, or moving.

· When lowering your monthly out-go, it’s interesting to see what % of a raise that affords you with your current income. As little as $400 savings per month that you get to keep can mean a substantial “raise” you can give yourself…and you pay no more taxes on it!