One of the biggest concerns we hear from clients when completing a home refinance is about high credit card balances that are leaving the homeowner with decreased cash flow available for their savings and retirement accounts. Let’s take a look at the following scenario and work through a solution that might be beneficial.
Homeowner Question: Hi, I have a few different credit card accounts, and the balances are all too high. I can’t afford to start paying more than the minimum monthly payments, and I’d like to start saving for retirement.
PRMI: Many clients find themselves in this situation. Have you thought about doing a cash-out refinance on your home?
Homeowner: No, I hadn’t. But that sounds like a good idea. How does it work?
PRMI: The cash that is refinance out of your home can be used to pay off your credit card balances.
In this article, we’ll look at how you can use debt consolidation to pay down your credit card bills and save for retirement. When it comes to refinancing your home loan, you can generally reduce your monthly payment amount; however, total finance charges, may be higher over the life of your mortgage loan.
Is a cash-out refinance right for you?
The first thing to consider is whether debt consolidation is right for you. If you have a lot of high-interest debt, like student loans or car loans, it could make more sense to pay off those debts first before focusing on paying down credit cards. Yet, if you’re trying to get out of credit card debt and want a more comprehensive approach, paying the minimums on all of your accounts is not going to make much headway. In this case, consolidating these debts into one loan may be the best option for getting back on track financially.
How much money could you save by consolidating your debts? The short answer: potentially thousands of dollars. According to Bankrate’s 2017 survey results (the latest year of available results), people who used a personal loan or home equity loan to pay off existing credit card balances saved an average of $1,609 per year. And these calculations only include interest paid over three years! So, if you were planning to take longer to slowly pay down your balances, you’re likely due to save even more!
How does a cash-out refinance work?
A cash-out refinance allows you to replace your existing mortgage with a new loan for the same amount. During this process, you’ll have the opportunity to withdraw a portion of your equity. The amount you can withdraw will depend on how much you have already paid down your existing mortgage. Lenders tend to require a homeowner to maintain at least 20% equity in their home after a cash-out refinance.
When you consolidate your debts, you’ll pay off your high-interest-rate credit card balances using the cash obtained from the cash-out refinance.
One thing to consider is having an emergency fund set up before consolidating any debts because some risks are involved in taking out such a large loan, including the inability to pay it back. But if done right, debt consolidation can be beneficial in terms of saving money and building wealth over time!
So my interest rates go down?
Many times, the interest rate for a mortgage refinance is lower than the interest charged by credit card companies. Your interest rate will be determined during the time of your refinance. Talking to a qualified loan officer, like PRMI, ensures you have the rates and fees that are applicable to your financial situation.
You may also be able to take advantage of tax deductions related to the consolidation process.
What are the benefits of cash-out refinance?
In addition to consolidating your loans into 1 monthly payment, you may find that your overall total monthly payment for your debts is lower. This will allow you to use the difference to continue building your emergency fund or saving for retirement.
If you’re ready to take the next step in your cash-out refinance journey, and you have less-than-perfect credit or high-interest balances, contact us today.
PRMI – Wooster has been helping clients purchase homes since 1998 and is backed by one of the most established mortgage lenders in the county with a nationwide presence. We offer a variety of loan programs for the greater Wooster, Ohio area – including Canton and Medina, Ohio. Are you looking for a trusted lender? Contact us by phone at 866.888.7902 or email Matt Shanlian at firstname.lastname@example.org.
*Opinions expressed are solely my own and do not express the views of my employer.