Credit Card Debt Hits All-Time High: Should You Refinance to Consolidate?
Americans have an absolute mountain of credit card debt- currently $986 billion, to be exact.
On top of that, automotive research company Edmunds reported that nearly 15% of drivers who financed a new vehicle at the end of 2022 are shelling out more than $1,000 a month, with overall averages hovering around $717 for new cars and $563 for used.
Personal savings rates also fell at the end of 2022. According to the Federal Reserve Bank of St. Louis, Americans have a personal savings rate of just 3.3%- the lowest rate since the Great Recession.
If you’ve been looking at your bills lately and wondering how to save on your monthly payments, you might benefit from a cash out refinance.
Should You Refinance to Consolidate Your Debt?
The benefits can be substantial when you refinance your home to pay off debt. Debt consolidation mortgages work best when the amount of equity you have in your home allows you to pay for a large percentage- or the entire balance- of high-interest debt.
And while many Americans are clinging to the historically low mortgage rates that came with the pandemic, it’s important to focus on the bigger picture.
Although you may be giving up your low mortgage rate, refinancing can allow you to lower your total household payments.
Consider a Cash Out Refinance to Pay Off High Interest Debt
Refinancing your home’s mortgage is a popular way to consolidate debt. By tapping into your home’s equity, you can get cash to pay off higher interest debts and consolidate them into your mortgage.
One of the main benefits of debt consolidation with a refinance is that you’ll likely pay less in overall interest. Mortgage rates are typically much lower than rates associated with credit cards, student loans, car loans, etc. A cash out refinance allows you to consolidate your high-interest debt and convert it into a lower interest rate.
Using Your Home Equity to Consolidate Your Debt
Equity refers to the percentage of your mortgage principal that you’ve paid off, so every time you make a payment on your home loan, you gain a bit of equity in your property.
You take equity out of your home in cash with a cash out refinance. In exchange, you’ll replace your current mortgage with a new mortgage for a higher amount. From there, you make payments just like you did on your last loan.
For example, let’s say you have a $100,000 principal loan balance and $20,000 worth of debt to consolidate. When you opt for a cash out refinance, you take on a loan worth $120,000 and your lender gives you the difference ($20,000) in cash after closing.
Closing Thoughts
Determining if you should refinance your mortgage for debt consolidation purposes will depend on a number of circumstances. The amount of equity you have in your home can determine the total amount of debt you’ll be able to pay off.
But with the right market conditions and enough equity to knock out a substantial portion of high-interest debt, a cash out refinance can help ease your monthly payments. As always, speak with your trusted loan officer to see if a cash out refinance is a good fit for you today.