I was talking to one of my friends about the rate that I pay on my mortgage when he mentioned something that I hadn’t thought about before. Although I’ve considered refinancing my mortgage because the current rate is almost two percentage points lower than what I currently pay, I hadn’t thought about refinancing and taking out cash out.
I’ve always heard not to take a loan against the equity in your home, but if I can pay off all of my consumer debt with the proceeds (and pay extra principal payments on the new loan) does it make sense?
I think if you can take that option and the payment is significantly less than the payments your making monthly on your consumer debt it would be a good option. I would even look and see if there are any tax benefits to rolling in any of the debts to the mortgage as well.
The down side is that you may be paying more in interest since you’ll most likely carry the mortgage out much longer than the consumer debt. I would definitely sit down with a counselor or coach to map it all out and do a projection of what your expenses would be and how much money you may save.
Consolidating your debt into a lower interest / lower cost situation can make sense. You should think about several things before doing this however. First, what are the upfront costs of the refinance? If you are paying points to lower the interest rate, that just adds to your debt. A home equity line of credit might make more sense. Less upfront costs and you can track your payments separately from your base mortgage.
The other issue is to look at what got you into the debt in the first place. Overspending will continue and you will be right back with consumer debt unless you identify those habits which are causing the problems. What are the underlying motivators both internally and externally which are causing you to be in this position?
Be sure to have all of that well defined before moving forward with the refinancing.
I know some friends that have done this when they sold a previous house and bought a new one! They were then able to invest the money from that cash out into things they needed for the new home, like a roof and new furniture.
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