If paying off credit card debt seems like a less-than-ideal way to be using your money, and you’ve built up some equity in your home, refinancing at current record-low interest rates to get rid of that debt can be a smart move.
Eliminating your credit card debt using a cash-out refinancing option allows you to take control of your finances and have a consistent budget. You can say good-bye to fluctuating monthly payments while taking advantage of home refinancing interest rates that are typically significantly lower than credit card interest rates. Let’s look at the following example:
Your mortgage loan is for $75,000, and you have $15,000 in credit card debt. If your mortgage interest rate is 3.5%, you will pay about $218 monthly in mortgage interest. If your credit card’s interest rate is 17.78%, you will pay about $223 in monthly interest. Combined, that puts you somewhere in the range of $441 each month in monthly interest payments alone.
If you use a cash-out refinance option on your home to pay off your credit card debt, it could look something like this instead:
If you get a new mortgage loan of $90,000 ($75,000 of your original mortgage + $15,000 to cover the credit card debt) with the same interest rate of 3.5%, you could expect to pay approximately $262 monthly. That’s an increase of $44 on your mortgage payment, but you no longer have any credit card payments or interest to worry about, saving you $200 or month a month.
How Does Refinancing a Mortgage Work?
Because you own your home, you can access the equity you’ve built up in your home to pay off credit cards, eliminate debt, and the interest payments they carry.
This can be done through a cash-out refinance mortgage, a simple and straightforward process: you get a mortgage for greater than the amount you currently owe on your home. You receive the “extra” money as a lump sum and use that to pay off your credit card debt. You make monthly mortgage payments the same as always, except now you no longer have the additional financial burden of making credit card payments as well.
Impact of Credit Card Debt
While your mortgage is considered “good debt” because your house goes up in value earning you money, credit card debt is considered “bad debt” and should be avoided whenever possible. Here’s why: Among the most expensive interest rates out there, credit card interest rates tend to be in the high teens or twenties, but some are even higher. At 36%, the First Premier Bank Credit Card is currently the highest credit card interest rate out there.
If you put a big-ticket item, like a 4K HD television, on a high-interest credit card, you could actually pay twice the value (or more) in interest rates alone if you only make monthly minimum payments. Credit card debt has a way of creeping up and landing cardholders in an endless cycle of debt without realizing it, and that’s just one reason why eliminating it is so important.
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Benefits of Refinancing
In addition to borrowing money and paying off credit card debt, home refinancing can generally provide one or more of the following advantages.
Lowering your interest rate
Arguably the most popular home refinancing benefit, a lower interest rate means paying less money each month. Are today’s market rates lower than your current mortgage rate? If so, you may be paying more money than you need to.
Locking-in a consistent interest rate
If your current home loan is an adjustable-rate mortgage (ARM), switching to a fixed-rate loan can help you save money by locking in one interest rate for the remainder of your mortgage term. Say good-bye to worrying about increasing monthly payments when interest rates rise.
Shortening your mortgage term
If your initial mortgage had a 30-year term, refinancing to a 10- or 15-year mortgage can allow you to pay it off faster, potentially saving you thousands of dollars over the life of your mortgage.
Improving your credit score
When paying off credit card debt by refinancing, you’ll be left with a single payment to deal with — your mortgage — and with a lower interest rate. Once you’ve eliminated your credit card debt, you might be tempted to close those accounts, but your credit score will benefit from keeping them open and unused or minimally used.
When you have available credit but only use a small portion of it or use it sporadically, you improve your credit utilization ratio (the amount of credit you’re using compared to the amount of credit you have available). Next to your credit history, it is the most significant influencer on your credit score. An improved credit score can help you get an even better interest rate in the future.
When it comes to home refinancing, you have options, including:
- FHA Cash Out refinance up to 80% of home value
- Conventional Refinance: refinance up to 80% of home value
- VA Refinance: refinance up to 100% of home value
If paying off credit card debt is your primary goal, a cash-out refinance should be your first stop when considering refinancing options.
You increase the equity in your home with every payment you make. Equity is how much you’ve paid on the mortgage principal; it’s how much you actually own of your home.
If your initial mortgage was for $175,000 and there is $100,000 remaining on the mortgage, you currently have $75,000 equity in your home.
You can take cash out from the equity you’ve built through a cash-out refinance. Cash-out refinancing is straightforward and very similar to the initial mortgage loan process. The regional refinancing specialists at River City Mortgage are ready to help you complete and submit your application and walk you through the underwriting process.
Depending on the refinancing product you choose, you may not need to get an appraisal on your home. Once all the paperwork is finished and you close the refinancing agreement, you’ll receive your funds.
If you have equity in your home, you don’t need to carry unnecessary credit card debt any longer. We can help you eliminate debt and put more money in your bank account at the end of each month. If you’d like to find out how much cash you could receive for paying off credit card debt through a cash-out refinancing, get in touch today.