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Daniel CohenMar 25, 2015

Use the Cash-Out Refinance Calculator to Learn if a Refinance is Your Best Debt Consolidation Option

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If you have significant high-interest consumer debt and own a home, a cash-out refinance might cut your monthly debt payments. A mortgage refinance may also help you get a new mortgage at a lower rate.

An important issue to consider is that using your home's equity to pay-off credit card or other consumer debt does not make the debt disappear. A cash-out refinance moves the debt from your current creditors (lenders and credit card issuers) into your home loan's balance. This has both positive and negative effects: it can save you money, but turns more of your debt into secured debt.

Use the following Bills.com cash-out refinance calculator to learn if you qualify for a mortgage refinance, and if you do, either how much you can save with a refinance or how much you can receive in a cash-out refinance.

Positive Effects of Consolidating Debt with a Refi

When you refinance a home loan to consolidate debt, you have the option to exchange equity for cash. You can use the cash to:

  • Remodel or repair your home
  • Pay-off credit cards
  • Pay-off a car loan
  • Finance a child's tuition
  • Pay for luxury expense

Obviously, some of these reasons are good — remodeling can increase the market value of your property — and others are frivolous. If you use a cash-out refinance to slash your interest rate on high-interest credit cards or avoid student loans, then it is a good idea. If you use a cash-out refinance to pay for a cruise or buy a boat, then a cash-out refinance may be a bad idea. If a cash-out-refinance cuts the rate of your existing loan, then it is an even more appealing venture. Make certain you can handle the size of the loan you get.

If you consolidate debt with a cash-out refinance, don't run up new debt on your credit cards. Too many people end up using their equity to consolidate their debt and then creating new debt problems, because they did not address the issues that caused them to run up debt in the first place.

Negative Effects of Consolidating Debt by Refinancing

Refinancing has benefits, but those benefits can get away from you if you skip your homework. First, get a loan you can handle — your consumer debt added to your existing mortgage might result in a payment you cannot afford. Second, when you pay off consumer debt with a mortgage refi, you spread your debt across the length of the loan (for example, 15 or 30 years), which means you will pay more in interest over the long-term. Third, a higher loan balance means you may not be able to sell the house easily if the market prices in your area drop. Finally, if you default on your payments, the lender will foreclose.

Mortgage Refinancing and Debt Consolidation Loans — Is It The Right Choice?

Make sure you can afford the new payments today and in the future. If you are unsure this is the right approach, research other debt consolidation services and options. You might find one that better fits your needs.