Are you buried in credit card debt? Is the interest rate so high that you are only able to pay make the minimum monthly payment? Interest rates on credit cards are far higher than the interest rates on a traditional debt consolidation mortgage loans and when you are just making the minimum monthly payment you are predominantly (or exclusively) paying the interest. Repeat: Just The Interest. This means you spend thousands of dollars over time trying to keep your account in good standing while your balance never actually goes down.
Nobody likes credit card debt. Fortunately, you can use the equity in your home to pay off your high interest credit card debt. This can significantly increase you monthly disposable income while saving you thousands of dollars in interest and lowering the balance on your credit line. When you are making payments on only your mortgage loan and not on your credit cards, you save money every month. This means you have more disposable income to spend on the things you need. How does it work? It’s called a debt consolidation loan.
What is a Debt Consolidation Loan?
A debt consolidation loan is a refinance loan on an existing mortgage. Your lender will use the money from your restructured mortgage loan to pay your credit card debts down for you. Basically, you are using cash from your mortgage to pay off your higher interest debts. When you do this, the amount you owe on your current mortgage loan will increase. This may result in slightly higher monthly payments or, more commonly, a longer mortgage term.
For example, if you needed $10,000 to pay off an old debt, you could refinance your current mortgage and get the $10,000 you need to pay off that debt. Your mortgage term would then increase by however many years it would take you to pay back the $10,000 following your usual monthly payment schedule.
The good news is, the interest rate you pay on your mortgage is significantly lower than the interest on your credit line. This means that even if your monthly mortgage payment increases, you still spend thousands less paying back your debt through your home loan lender than you would if you made payments directly to your credit card lender.
Debt Consolidation Loans vs. Cash-Out Refinancing
Debt consolidation mortgage loans and cash out loans are similar, as both types of loans allow you to tap into your home’s equity in order to pay for something else. They have similar requirements and both are particularly useful now with today’s historically low rates. Generally, both require that you have a credit score of 640 and you are capped at 85% loan to value. This means that if you have an existing mortgage loan for $100,000, the most you would qualify for to consolidate debt is $85,000.
The major difference between a cash-out refinance and a debt consolidation loan is that you actually get the cash to utilize personally with a cash-out refinance. With a debt consolidation loan, your lender will generally make a payment on your other existing debts for you; thus you never actually handle the money yourself. In either case, money is still freed up that you can use on other personal things.
Think about this: while the interest on a credit card may be between 12% and 29%, the interest on your mortgage refinance is likely to be closer to 4.5% (or even lower). The lower your interest rate, the lower your monthly payment. So, rather than paying $1,000 on your credit card debt every month, you can make the same monthly mortgage payment as usual (if for a longer period of time). That’s $1,000 a month you are not paying to the credit card company or anyone else. You can use this saved income to cope with day to day expenses you were struggling to pay before. You can put it into a retirement fund or savings account for an emergency. It’s up to you what you do with it.
Is a Debt Consolidation Loan Right for You?
Florida Home Funding will provide you with a complete debt consolidation analysis that will allow you to make an informed decision. We take pride in determining the net tangible benefit that the mortgage refinance will result for our clients. We provide debt consolidation loans and refinancing solutions that are tailored to suit your needs. See more about our other home loan and refinancing options:
- Fixed rate mortgage
- Adjustable rate mortgage
- FHA loans
- VA loans
- USDA loans
- Home Affordable Refinance Program (HARP)
Call (407) 704-8729 to speak with a licensed mortgage professional or complete the fast quote form now.