When you have equity in your home or investment property, should you use that equity to consolidate debt, any consumer debt, and potentially save thousands?
It depends. If you have 0% interest on any of your credit cards, converting those payments to any interest-bearing debt, such as a mortgage, is not to your benefit although it may lower your monthly outlay.
If however, you are carrying cards with an interest rate of anything over a mortgage interest rate, it may make sense to use some of the equity in your home to pay these cards off.
There are two important factors to keep in mind: what is best for you in the immediate future and what is best over a longer span of time.
The Immediate Future
What do we mean by immediate future?
If you currently have high-interest debt whether it be credit cards, a vehicle loan or other installment debt, or have a payment arrangement with the IRS, you may find that by refinancing with a "cash-out" mortgage, you can pay off all your other debt. This usually has the effect of saving homeowners hundreds or thousands of dollars each month. This would give you immediate relief from high monthly expenses.
It is important to analyze how a refinance to consolidate debt will affect your finances over a longer period of time. Although refinancing may lessen a current cash-flow burden, what are the long-term implications?
- If your current mortgage has 20 years left until it is paid off, and you refinance into a 30-year loan, this will add years until the payoff date and may will increase the overall interest you are paying over the life of the loan.
- You might opt for a new loan which is paid in full over the same length of time as your current mortgage - 20 years. Because the time to payoff has shortened, your monthly mortgage payment may be larger than if you opt for a new 30-year loan.
There is no right or wrong and every situation is different. The refinance calculator will give you some idea but for an in-depth analysis, your mortgage originator can show you how a refinance will affect you, now and in the future.
Consolidating Two loans into One
If you have two or more loans on your home, refinancing them by combining into a single mortgage may also have the effect of saving you thousands. If your current 2nd is a HELOC (home equity line of credit), the rate is adjustable and can go as high as 18%. If your 2nd is an Equity Loan with a fixed rate, it may also make sense to combine both loans.
Even if you have a low interest rate on your first mortgage, by blending the rate with your 2nd, you may find you are paying more each month than by combining into a single loan.
Call us and we'll be happy to analyze your current mortgages.