Debt Consolidation with Mortgage Refinance: How it Works

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What does it mean to consolidate your debt and refinance your mortgage? As debts go, mortgages tend to offer low-interest rates, which is why many consider refinancing their mortgage as a means to pay off other debts they have accumulated. Think about it, instead of having to stay on top of credit card payments, medical bills, student loans or any other form of unsecured debt, you will have one regular payment to keep track of. 

With consolidation, you’ll keep your monthly payments lower than what you were paying, with added benefits like the refinanced loan being tax-deductible. It’s considered a solid financial strategy to refinance your existing mortgage if you have sufficient equity on your home. Read on to learn how to pay off unsecured debts once your property is appraised and the balance on your mortgage gets deducted.

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What Is Debt Consolidation with a Mortgage Refinance?

Debt consolidation will involve merging several payments into one using a cash-out refinance loan. With money from refinancing, you’ll pay off high interest or unsecured loans while saving yourself the hassle of paying multiple bills. The process involves applying for a new mortgage with an amount larger than the total balance owed.

For instance, if your mortgage balance is $200,000, you can refinance your home for $300,000, using the remainder of $100,000 to settle other outstanding debts. The ability to consolidate your debt depends on whether your house has enough equity and if you qualify for another loan. Your new loan shouldn’t exceed 80% of your home’s value, and your income or credit score determines qualification.

If you borrow more than your house’s equity is worth, you’ll have to pay for private mortgage insurance or PMI. That’s so that your lender can get protected from losses incurred in case of foreclosure. The cash-out refinance loan pays off your existing home loan, and you receive the difference between what’s owed and the new borrowed amount.

Can You Refinance Your Mortgage to Consolidate Debt?

Refinancing your mortgage to pay down debt is a valid option, as it can significantly reduce the interest rate on some of your outstanding debts. Your credit card debt could be charging upwards of 15% interest, and once paid off, you’ll remain with mortgage premiums repaid at four or five percent. But that means you’re stretching out repayments over a much more extended period, depending on how long it’ll have taken you to clear them.

When wondering if you can refinance your mortgage to consolidate debt, remember that you’ll need enough equity in your home. If you’re an equity-rich homeowner, a cash-out refinance is an attractive option to consolidate your debts. You’re required to remain with at least 20% minimum equity after refinancing, and the more you have, the higher the amount of cash you’ll receive.

Another factor that lenders consider before approving your refinanced mortgage is the loan to value or LTV ratio of your property. That’s a lending risk assessment, calculated as a percentage by dividing the amount you want to borrow against your home’s appraised value. Low ratios, 80% or lower, meaning you have more home equity, are closer to owning it, and are more likely to have refinancing approval.

How to Refinance Your Mortgage and Consolidate Debt

When looking at how to refinance a mortgage and consolidate debt, you could also take out a home equity loan, using the proceeds to clear off other debts. With lower interest rates than personal loans, credit cards, or car notes, the smaller loan on your property lets you pick a repayment period.

Cash-out Refinance

With cash-out refinance loans have the benefit of letting you consolidate your debt at lower interest rates, but yo