understanding debt consolidation with a mortgage refinance

Understanding Debt Consolidation With a Mortgage Refinance

Do you have various debts piling up? Debt consolidation through a mortgage refinance may be an option to consider. A consolidated loan can combine all your qualified loans into one, allowing you to pay the entire loan off faster. Many factors come into play as you decide whether debt consolidation with a mortgage refinance is right for you, so it’s essential to consider them before you move forward.

What is a Debt Consolidation with a Mortgage Refinance?

A mortgage refinance with a cash out is when you borrow more money than you owe on your existing mortgage. The difference is used to pay off other debts such as car loans, credit cards, and student loans. Certain types of loans will allow you to borrow more than your home’s value than others. Some examples of loans include:

  • Conventional cash-out refinance
  • FHA cash-out refinance
  • VA cash-out refinance
  • Home equity loans
  • Home equity lines of credit (HELOC)
  • Reverse mortgages

Pros of a Debt Consolidation Loan

The benefits of pursuing a debt consolidation mortgage refinance include the following:

  • Can pay off higher-interest credit cards
  • May improve your credit score due to less revolving debt
  • Create more room in your monthly budget
  • Interest savings can be applied to your loan’s principal to pay it down faster
  • Your savings can be used to build an emergency fund

Cons of a Debt Consolidation Loan

There are drawbacks that you must consider, such as:

  • Increases your monthly mortgage payment
  • You may have a higher interest rate
  • Must pay closing costs that are between 2-6% of the loan amount

How Mortgage Refinances Affect Your Credit

When you combine multiple debt balances into a single loan, your credit score will likely rise in the long term. However, it’s possible to see an initial decline in your credit score. These short-term effects are due to three factors:

  • New credit account — You’re opening a new credit account, which temporarily lowers credit scores
  • Applying for new credit — When you apply for a loan or credit card, the lender will do a hard pull on your credit. This will lower your credit score by a few points.
  • Reduces the average credit age — Opening a new credit account adds to your history, lowering your overall average account age. This may lower your score a bit.

Remember that these effects on your credit score are in the short term. A new account will lower your credit utilization ratio because it increases your overall available credit. As long as you make timely payments on your account, this will improve your payment history. These positive factors will take time to impact your score.

How to Get Approved for a Cash-out Mortgage

A consolidation loan may help you get out of debt and into more manageable payments. To get started, follow these three steps:

  1. Review your credit score. Not sure if you have a good enough credit score? Check your credit report and make sure everything is correct. If there’s something wrong, it could damage your credit score and require an immediate solution.
  2. Determine your goal. The type of loan you’ll want to apply for depends on what your goal is. The money you save on high interest can be used toward paying down the mortgage balance.
  3. Apply for the loan. Now that you’re ready to apply for a loan, get your documents ready. You’ll typically need to provide certain documents such as your last pay stubs, bank statements, tax returns, and driver’s license to apply.

First Centennial Mortgage may be able to help you manage your monthly costs with a mortgage refinance. Get in touch with us to learn more about your options today.

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