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Refinance Mortgage to Pay Off Debt
In today's difficult and unpredictable economic environment, more and more people are withdrawing equity from their properties to pay off debts, cover unforeseen expenses and solve other financial problems. Mortgage refinancing means that new financing is put in place for the donated property.
Sometimes this is done because a better mortgage lender has been found and the interest rate and terms of the new loan are better for the homeowner. However, for the most part, people refinance their properties due to some inconvenience, such as debt. In this case, they get a new mortgage, a higher loan-to-value ratio and take a certain amount of money from the available capital.
While mortgage refinancing can be a good option to get rid of debt, there are many factors to consider before making the decision:
1. The total expenses associated with refinancing must be estimated. i.e. attorney fees, property appraisal fees, prior mortgage cancellation penalty, likelihood of being required to purchase mortgage insurance, etc.
2. When all of these expenses are added up, what percentage of the debt can actually be paid off with the money that needs to be spent on fees? Sometimes you have to spend 5,000 to refinance and only 20,000 to pay off the debt.
3. The long term plan should be established, usually 12 months is sufficient, and the pros / cons of costs, interest rates and all charges involved in the transaction should be compared. It's very easy to fool yourself into thinking that a 10% interest difference will save you money (in many situations it will, but if the debt can be paid off in a year, it doesn't. it is not beneficial to spend the time and money to refinance and in when all is done (solved, save $ 500).
$ 10,000 credit card debt at 15% per year = $ 1,500 interest per year
Debtor owns property worth $ 100,000
The mortgage is $ 75,000 and therefore an equity of $ 25,000
Current mortgage rates are 4.5% and regulations allow a 90% loan to assess loans.
Debtor decides to withdraw $ 10,000 of the principal (at 4.5%) to cover the $ 10,000 debt (15%)
Although there is a saving of 1,500 - 450 = $ 1,050 in interest at the end of the year, the debtor must spend: $ 600 on appraisal, $ 1,500 as a penalty for breach of the current mortgage contract and because that the new mortgage will be canceled. The 90% loan to assess regulation requires 3% mortgage insurance - $ 2,500 (usually split into installments and taken out with mortgage payments for 60 months)
In fact, the total cost of refinancing is 600 + 1,500 + 2,500 = $ 4,600. So the interest savings of $ 1,050 is just an illusion.
Home Refinance Mortgage to Pay Off Debt is suitable for people who have a large amount of debt that will take a long time to pay off. In such cases, debtors can save a lot of money on interest payments (assuming the new mortgage rate is lower than the interest on the current debt), as well as maintain a good reputation with their creditors and maintain a good reputation. strong credit rating.
There are other options available, such as a secured line of credit, secured home equity debt consolidation loan, and more. We will come back to this in future articles.
We hope this article has been informative. We cannot stress enough: please calculate all costs and if you have any difficulties, hire a qualified professional to advise you on the best decision.