How to Consolidate Your Debts with a Mortgage Refinance Loan

 

Are your bills making your life miserable? Well, if your property has equity and you have a decent income and credit, you may be able to use your property to reorganize your finances to more manageable levels.

You have several options for using property’s equity to consolidate your debt:

• Cash-out refinance
• Home equity loan
• Home equity line of credit (HELOC)
• Reverse mortgage

Another advantage of a debt consolidation refinance or home equity loan is that the lender will not count your payments on most of your liabilities when qualifying your income. Their debt-to-income (DTI) calculation only looks at long-term debt that will be around for at least ten more payments. If a debt will be paid off, it won’t be included in your DTI qualification.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage (or creating a new one if you don’t have one) on your home or property with a new mortgage loan and a higher principal balance.

You are then free to use the surplus cash for anything you want to do. However, if your income was qualified for the loan based on having certain debts paid off, your lender will insist that those debts be paid off at the time of closing. In fact, they will instruct the loan closing agent to pay off those debts before releasing any of the remaining funds to you.

The Keys for Getting the Best Cash-Out Refinance article goes into more details about the workings and requirements of a cash-out refinance.

If you are refinancing your primary residence, you can get up to 85% LTV (loan to value) financing, which means that if your home is worth $200,000, you can get a loan for $170,000 (85% of the appraised value). Of course, this new loan must first be used to pay off your existing mortgage loan, after which the surplus funds will be used for debt consolidation.

Home Equity Loan

There are many times when you don’t want to touch your existing first mortgage loan. In such cases, a second mortgage home equity loan may be the best option.

For example, if you have already paid six-plus (6+) years of interest on it and it has a decent interest rate, you may want to leave it alone. But you can still use a home equity loan to tap into your property’s equity.

This home equity loan is typically a second mortgage loan recorded behind your existing first-lien mortgage loan. For more information, check out our section on home equity loans.

Home Equity Line of Credit (HELOC)

The HELOC or home equity credit lines is exactly like the home equity loan. However, instead of giving you a check to use for debt consolidation, it gives you a credit line.

It’s much like a credit card, although most home equity credit lines give you a checkbook.

You can then tap into your credit line to pay off debts or use the funds as you will. You can also pay back any portion of your credit line balances.

The great advantage of home equity lines of credit is that you only interest on the balance you maintain. If you choose to NOT use your equity credit line, you never have to make any payments — but can rest assured with the knowledge that you have a credit line available for emergencies and special needs. For more information, please check out our section one home equity lines of credit.

Reverse Mortgage

One additional debt-consolidation refinance loan option is available for homeowners who are at least 62 years of age: the reverse mortgage loan.

The reverse mortgage allows qualified seniors to tap into their property’s equity — without ever having to worry about mortgage payments ever again. This is probably one of the best programs available for senior homeowners today, especially those who have paid into their homes diligently over the years.

As long as they live in that property, the reverse mortgage will never require repayment. In the mean time, it can give the homeowner a lump sum check or a series of monthly annuity payments that he or she can use for any purpose.

For more information, please see the How to Find the Most Reliable Reverse Mortgage Loans article.