How and why consolidate debt
There's a lot of talk these days about debt consolidation. And, no wonder. When
mortgage interest rates are low, it's a great time to use the equity in your
home to pay off higher-interest debt like credit cards and car loans and instead
make only one low monthly payment. You'll not only free-up cash flow but it's
very likely that the interest will be tax-deductible.
Here are the two most common ways for using the equity in your home to
consolidate debt.
cash-out refinance - for when you have equity
A cash-out refinance is the best option if you have a lot of equity in your home
and your current mortgage interest rate is higher than the rate being offered
today. With a cash-out refinance you'll pay off your current mortgage and get
cash back to pay off credit cards and other loans. While it's true that your new
loan amount will be more than what you owed on your old mortgage, you'll use the
cash to pay off other debt. You'll still have the same amount of debt; but now
it's "consolidated" at a lower interest rate and with interest that's most
likely tax deductible*. (Typically, credit card and other loans interest is not
tax deductible.)
home equity loan - for when you have equity and a low rate
So, what if you've got a lot of equity in your home, but your current interest
rate is lower than the rate being offered today? That's when you consider a home
equity loan. A home equity loan is an additional loan that borrows against the
equity in your home. So, let's say you have $50,000 equity in your home and
you'd like to pay off $15,000 in high interest credit card and other debt. You
take out a $15,000 home equity loan. And, while home equity loans usually have
higher interest rates than cash-out refinances, chances are the interest rate is
much lower than the debt you're paying off.
