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Pros and cons of refinancing to condolidate debt

Posted by  on Dec 13, 2010
 

If you're like many Americans, you may be searching for a way to pay off thousands of dollars in debt. There are several solutions to your debt woes, such as cutting up credit cards, cutting back on expensive services, or even working with a debt counselor. Some homeowners even use a home refinance to consolidate their bills. Consider the following pros and cons to doing a cash-out refinancing to pay down debt.

Wipe out your bills

Cash-out refinancing involves tapping home equity so that you leave the closing with cash in your pocket. The money received in a cash-out refinance certainly could help you pay off high-interest debt. You could save hundreds or even thousands of dollars in interest payments by paying off bills. Getting rid of debt also can get creditors off your back and put an end to annoying phone calls from bill collectors.

Cash-out refinance and home equity

One of the biggest drawbacks to doing a cash-out refinance is that you give up some of your home equity. Your mortgage lender also must agree to a cash-out refinance. However, many mortgage lenders are not approving cash-out refinancing for homeowners because so many neighborhoods have seen significant drops in home prices. Even if you live in a housing market that is doing OK, you may have a tough time getting approved for a cash-out refinance.

Should you cash out your equity?

Let's assume that you can qualify for a cash-out refinance. Before applying for a mortgage, ask yourself the following questions:

  • Are you reluctant to give up home equity? Housing values may still be declining in your neighborhood. If you pull cash out in a refinance, your home's value may end up even lower in the future. If the idea of that happening worries you, doing a home refinance to get cash may not be such a a good idea.
  • How important is it to you to pay off the mortgage early? If you've dreamed of the day you can burn your mortgage note, it's important to crunch the numbers of a refinance to determine how many years your payoff plans may be delayed.
  • Are you ready to give up the poor spending habits that might have contributed to your high level of debt? Refinancing to pay off bills won't improve your financial situation if you run up more debt. If you aren't sure how to curb the urge to spend, find a debt counselor who can help. You may need guidance on setting up a budget, dealing with impulsive spending, and other issues that may be holding you back financially.

Best mortgage rates

Current mortgage rates are attractive if you are shopping for a home refinance. If you've been paying on your current mortgage for 10 years or longer, you may have enough home equity to qualify for a cash-out refinance. If you don't qualify to take cash out, refinancing could still help your financial situation by lowering your mortgage rate. If possible, consider refinancing into a 15-year mortgage to cut the amount of time it will take to own your home free and clear.

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