If you have thought about using your home equity to consolidate debt or finance a renovation, it might be the right time. When interest rates are at low levels, refinancing becomes an attractive option. Paying off high-interest debts may be a smart thing to do.
What’s a refinance?
A refinance alters the terms and conditions of your mortgage; specifically, you are increasing the amount of your mortgage to pay off debt. Your mortgage payment may or may not increase, depending on a number of factors, but you will be paying off the refinanced debt at a much lower interest rate, which could save you thousands of dollars in interest in the long run. Here are a few reasons consumers opt to refinance:
- Decrease your overall monthly debt payments by using your equity to pay off those high-interest credit cards or unsecured loans, which can help you better manage your budget.
- You can refinance to purchase another property. Using the existing equity in your home can be a great way to buy a rental property which, if done right, can also make the interest you pay tax deductible.
- You could also take out some of the equity for investment purposes -- an option that many homeowners consider this time of year as they look ahead to the new year.
- And there are more uses for your equity such as helping putting your kids through school.
Repayment
Borrowing against your property is not free money. You still own the home so the mortgage loan has to be repaid.
Spending Habits
While using the equity in your home to pay off debt certainly eases financial stress, there may still be challenges. Some people may have experienced a job layoff or an illness that contributed to their debt loads. Make sure you understand your current situation.
Real Estate Market
Equity measures the fair market value of your property against the balance owing on your mortgage. If you borrow against your property, you may worry that the market will drop and your home value with it. However, there is a safeguard – you can only refinance up to 80% of the value of your home. that percentage has dropped to 80%. House prices will not likely fall far enough for you to lose equity.
Speak to a Professional to Understand Your Options
As you can see there are many factors to consider before deciding to refinance. Each individual’s financial situation is different. Let’s talk about your unique situation and the options available to you.