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No matter how good our intentions are, with the "Gotta Have It!"
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 beneficial way to wipe the
slate clean, or at least get a handle on high debt, is through a
"Cash-out Refinance".
If you have Equity in your house (that is if the appraised value is
larger than the amount currently owed on your Mortgage Loan), 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 had 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...which leads to the next benefit...
· Term Reduction with a totally new loan, you have the opportunity of
re-structuring with a shorter term directly OR indirectly, as shown
above, by taking monthly savings of money not now needed on credit
cards and applying the money to your loan, shortening your term.
· Payment Deferral when refinancing, you usually end up skipping a
payment, sometimes two, in the lender switch. That can add up to a
substantial amount that could be reapplied to your home loan or more
pressing necessities.
· Raising Credit Scores, Mortgage loans are looked at more favorably
than credit cards, especially when your balances on those credit cards
exceed 35-50% of the maximum balance allowed. By paying off these
loans, credit scores go up naturally when the companies report their
information (usually in 3 month intervals).
· 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 only few of the benefits to refinancing for debt consolidation.
There are some precautions, though, that MUST be recognized or you'll
find yourself even 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 30 years or more to pay
off the balance of $5000. 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
an increase 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!
ABOUT THE AUTHOR:
Tamara Schmitt is currently a Loan Officer with 1st United Mortgage. Tamara is also an Business Partner of Get Loans Cheap,
an internet business geared solely to educate and aid the consumer in
assessing and obtaining the right loan for their specific needs. View
the site for more articles on mortgages and refinancing, or other home
loan needs. |