Cash Out Refinance

Do you have credit card or student loan debt? Consider a cash-out refinance.

Many Americans struggle with their monthly credit card or student loan debt, and those who are homeowners cringe at the idea of taking out a cash-out refinance to pay this debt. Most fear losing the lower interest rate they have on their first mortgage.

The problem is that you must consider your blended rate across all of your debts to determine whether or not it makes sense to take out a larger first mortgage and consolidate all or most of your other debts.

Take this example.

Johnny owns a home that is worth $300,000 and has the following debts:

  • $150,000 mortgage at a rate of 4.25%
  • $40,000 credit card balance at a rate of 18.9%
  • $20,000 equity line at a rate of 6.25%
  • $210,000 in total overall debt

He does not want to refinance because he does not want to lose his rate of 4.25% (current 30-year rates are just above 5.0%).  But in reality, the blended rate across all of his debt is really 7.231%! Click here for rate and APR assumptions.

So, if Johnny could consolidate all of that debt in a mortgage at a rate of 5.125%, he would be in great shape and save a ton of money on a monthly basis, not to mention, he now only has to worry about a single monthly payment.

The main point of the story is you have to look at your overall debt and all of your options when evaluating the best course of action to help you eliminate debt. Perhaps a cash out refinance is the key to financial freedom. Just remember that after you consolidate your debt into one larger mortgage, you should live within your means to avoid racking up that credit card debt again.  A second time through may prove more difficult.