There have been homeowners who have used refinancing as a way to pay off debts from unsecured sources, like personal loans or credit cards, as cash out refinancing has seemed to be one of the easier ways which consumers can erase debt, by essentially consolidating these unsecured debts with their mortgage debt. Low interest rates on home loans allowed for some individuals to refinance their home at a lower rate, which was helpful when they used cash-out as a way to gain access to money from their home’s equity and erase debts in other areas.
These homeowners who used cash-out refinancing felt that, in many cases, unsecured debt was more costly as interest rates were higher on things like credit cards, but when consolidated with a home loan, a mortgage interest rate could be substantially lower and could save homeowners on costs. Obviously, not all homeowners were able to benefit from refinancing to a lower mortgage rate and were unable to use this option for erasing debt, but there are still homeowners who have options to use cash-out refinancing to find personal debt relief.
However, there are some advisers who feel that cash-out refinancing is typically an option that homeowners should avoid in terms of debt relief. Again, cash-out refinancing is essentially consolidating debt and attaching it to a mortgage, as homeowners refinance for more than the remaining balance on their home and use the additional money to pay off debts. Obviously, this can create a higher mortgage obligation which can be problematic if homeowners are not careful with their personal finances.
There are numerous financial advisers who also feel that erasing debts separately can be more cost-efficient as meeting a higher mortgage debt obligation or, in some cases, focusing money on one’s mortgage debt and erasing what is owed early could bring penalties as well. Yet, there have been homeowners who, after using cash-out refinancing to erase debt, have begun to practice more responsible financial habits and have focused a great deal of funds towards erasing their mortgage rather than acquiring more debt.
There are advisers, though, who prompt homeowners to explore options outside of cash-out refinancing for erasing debt. There are some homeowners who may be able to enter into a personal budget or repayment plan which will allow them to erase debts separately, by attacking debts from either the smallest amount to the highest or the highest interest rate to the smallest, but this obviously will depend upon a homeowner’s financial position as to whether this is an option.
While careful consideration must be taken on the part of homeowners before cash-out refinancing is used, one thing that advisers have stressed is that homeowners must make sure that if they are able to refinance they get a lower rate and more affordability on their home loan terms, as again, they will be essentially acquiring a higher mortgage debt. Obviously, when refinancing is not beneficial, in terms of offering a lower interest rate, but homeowners may simply not benefit in terms of overall costs from this type of refinancing opportunity.