N.E.O. Home Loans - Re-Establish Your Budget by Consolidating Your Debt

Re-Establish Your Budget by Consolidating Your Debt

Do you feel your monthly budget tightening up? This can be due to many different things like credit card debt, a rising mortgage payment, or even a pay decrease or job loss. If you have built equity in your home there may be an option to help loosen up that budget and allow some room to breathe.

Why Choose a Cash Out Refinance

The purpose of a cash out refinance is to pay off your existing mortgage and borrow a set amount of money against the remaining equity left in the home. It's a less risky loan when compared to a 2nd mortgage like a home equity line of credit. Because of the reduced risk, the interest rates on cash out refinances are typically lower than those on 2nd mortgages. Also with a cash out refinance you can lock into a fixed rate mortgage where with most home equity lines of credit, the interest rates are adjustable. There may be more costs with a cash out refinance but you will almost always make them up with the lower monthly payment.

How a Cash Out Refinance Works

Let's take a look at a scenario and see the savings that you could benefit from by doing a cash out refinance.

Assuming you have a home valued at $150,000. Your current mortgage is for $100,000. This means that you have $50,000 of equity in your home.

For example, when you bought your home your initial mortgage was for $125,000 at 6.00% for 30 years, resulting in a $749.44 monthly principal and interest payment. Now let's say that you have three credit cards with a balance of $5,000 on each one, and the minimum monthly payment is $125. This means that you have $15,000 in outstanding credit card debt and a minimum monthly payment of $375 for the three cards. Not to mention that just by paying the minimum monthly payments on your credit cards barely reduces any of the balance.

So far we have a monthly principal and interest mortgage payment of $749.44 and an additional $375 going to the credit card companies for a total of $1,124.44.

Now let's work some magic and find how much you can save by doing the cash out refinance. We will take the $100,000 that you owe against the home and add the $15,000 in credit card debt for a new total mortgage amount of $115,000. For examples sake, your new 30 year fixed rate mortgage will be at the same 6% interest rate. The interest rate may be higher or lower depending on your current situation and what the market provides. So your new monthly principal and interest payment will be $689.48. You went from paying $1,124.44 a month in bills to consolidating them down to a payment of only $689.48. That is a difference of $434.96 a month.

You may be saying to yourself, "But I have already been paying on my home for 10 years. I only have 20 years left. I don't want to add those 10 years back in". If that is the case then let's see what taking you down to a 15 year term will do. If we take $115,000 balance at a fixed rate of 6% for 15 years, your new principal and interest payment is $970.44. That is still a difference of $154 dollars a month and you even shortened your term by another 5 years.