Refinancing is another option to obtain the equity in your home for personal debt consolidation. This is appealing if your current mortgage has a high interest rate, or you've made a decision to start over again with a new, longer mortgage and to seek personal debt consolidation.
By using a “cash-out” option, this allows you to pay off the balance of the current loan, refinance your mortgage, and take additional cash out to pay off any other debts. In a lot of cases you may be able to borrow up to 90% of the value of your home in a cash-out refinance. A lot of this depends on your credit score and if you're self-employed. If you have a lower credit score or self-employed generally means you will not be able to borrow as much on the cash-out loan.
Why in the world would you want to extend your mortgage? The answer is, leverage. So many of the new mortgages give you options like interest-only payments for the first several years, or fixed rates in payment for the first 2-5 years, followed by adjustable rate. The advantage to this type of loan is that you can actually reduce your payment, allowing you to have more of a cash flow on a monthly basis for personal debt consolidation and ridding debt from your life. If your purpose is to free up cash our wealth- producing then this can be a great option for you.
For example, real estate investments, mutual funds, or personal debt consolidation are all benefits of home equity loans. If your plan is just to free up money to spend irresponsibly on wants such as new cars, trips to Alaska, and other irresponsible things, then you're just wasting a good opportunity to move forward in your financial future.
Refinancing is rarely free. About 4% of the mortgage amount generally goes to closing costs. Some lenders advertise no cost refinancing, but generally give you a higher interest rate to make up the cost. Keep in mind that it might be a great idea if you plan on using your money wisely for wealth-producing investment.
Don't get the misconception that you can buy a home loan and pay off your unsecured debts. Bank lenders generally finance of 207% of the actual purchase price of a home. The extra 7% is usually just enough money to cover closing costs and other CDs that come with purchasing a home. Beware of homes that will land at more than 107%, they are usually a debt trap. If you purchase a home that is below market value, you might have a legitimate chance of getting a home equity loan and keeping the remaining balance to pay it off any unsecured debts that you might have through personal debt consolidation. You can even sell the home for true value and use the remaining balance to pay off unsecured debt.