Cash out refinance provides homeowner with a Free Debt Consolidation Loan. But you, a homeowner has to be careful. This Free Debt Consolidation Loan can be a dangerous deal if not done properly.
Getting into Free Debt that will need Consolidation Loan very soon
Life is great - you own a house, and you live comfortably paying off a 30 year mortgage with a low interest rate under 6%. You own two nice cars, big screen TV, kids are going to good schools and doing great, taking music and dancing lessons, etc.
You owe around $10,000 on credit card. Plus your wife wants a new kitchen. Whatever she wants, she gets, so you go to a fancy place, not Home Depot or Sears, thank you very much and spend $20,000 on a beautiful set. No biggie, your credit card is still free, charging 0% interest for the next 2 months and the kitchen deal gives 6 months the same as cash.
No more Free Debt cost is mounting - what Consolidation Loan to choose
Few months later the fun stops suddenly. Your credit cards are charging you 13% interest. Bad, but not as bad as 19% that kitchen place just hit you with. You are no dummy, you want a way out and think hard.
Friend gives an idea to get rid of your Debt with Free Consolidation Loan – refinance you house why the rates are still reasonably low and pay off the cards and kitchen and anything else you need.
Well this is a really smart thing to do and make you mortgage broker happy too. Just does it right. By tapping into equity in your house you will obtain the cheapest, almost Free Debt Consolidation Loan available on the market.
True, you will increase your mortgage by whatever amount you have to borrow, and even more importantly, you will start a new 30 year amortization loan thus paying mostly to your interest, but you will get a tax deductible interest around 6% and you keep your credit good. When we say 30 year amortization instead of 20 or 15 we assume that you will be looking for the lowest monthly payment and that is what 30 year provides. If you can afford a 20 year or a 15 year with a new larger mortgage, you don’t probably need to take money out of your house all together.
Few things to know about Free Debt Consolidation Loan while using your house as a bank
- the Free Debt Consolidation Loan is not really free, but can be very inexpensive and by far the cheapest deal you find
- do it while your credit score is still high, over 620 at least – once the credit is ruined, you are really at your broker’s mercy, so do the Free Debt Consolidation Loan before you fall behind with the payments
- make sure your property value is high enough so your loan to value ratio is below 80% - if not than the cost of your new loan will be higher
- don’t pay any points to your broker, ask if he can cover the closing costs – never hurts to ask
- if you have lived in your house for more than 5-6 years, it makes sense to keep an original mortgage and instead try another Free Debt Consolidation Loan – Home Equity Credit Line
- shop around for the best deal – again do it while your credit is good
Few more things to know about your Free Debt Consolidation Loan
- look at cash out refinance as one time deal – don’t get into more debt after you pay off an existing debt – remember, your broker makes money every time he refinances you
- again, you house isn’t ATM machine - resist the offers from your broker six or eight months down the road after you have refinanced, to check if there is any equity left in your house, so he can refinance you again and make more money for himself – he will do it until there is nothing left
- once you pay off the debt, see if you can save some money and put it back as an extra payment into your mortgage principal - by doing so you may shorten your new 30 year mortgage considerably – see Become Debt Free for more suggestions
So the main benefit of this Free Debt Consolidation Loan is that by taking money from you house you can obtain a low tax deductible monthly payment. Essentially you are paying it back to yourself. Of course, you are giving some to the bank that holds your mortgage, but at 6% or so plus tax deduction, it is a lot better that 13 to 21% without any tax breaks.
