Leveraging a Home Refinance Loan for Debt Consolidation

Another way to overcome excess debt is to use your residence to obtain a refinance loan for debt consolidation. Below are some things that you will need to consider before deciding to go through with the loan.

Examine Your Equity

Before you consider whether a refinance loan for debt consolidation makes sense for you, it's important to know how much equity you have available. Equity is the difference between what you owe on your mortgage and how much your residence is currently worth. For example, if you owe $250,000 on a home that's now appraised at $500,000, your equity is $250,000. This is an amount that you may be able to tap into through a refinance loan.

Determine How Much You Really Need

Using the same scenario as the above, do you really need or want that $250,000 in a cash-out refinance loan for debt consolidation?  Although it may be available to you, it's not a good idea to go for it all. This only adds to your new refinanced home mortgage - which you'll be paying for during the next 15 to 30 years, depending on length of contract. Only request as much cash-out as you really need to pay down or consolidate your existing debt.

Look at All the Refinancing Costs

Before you sign on the dotted line, look closely at all the costs involved to refinance your existing home in order to consolidate debt. These include not only the interest rate (which should be at least 2 percentage points less than your current mortgage interest rate) but also the amount of the closing costs, any points you'll be charged, and any pre-payment costs for early payoff of your loan from your existing mortgage lender. All these costs can quickly add up to more than $10,000, on top of the debt you're trying to consolidate. Bottom line: is the refinance loan for debt consolidation the right answer for you?