Cash-Out Refinance For Debt Consolidation

This guide covers cash-out refinance mortgage guidelines for debt consolidation. Home values have appreciated tremendously in the past few years. Many homeowners have seen their homes appreciate double-digitly year after year. John Strange, a senior mortgage loan originator at Mortgage Lenders for Bad Credit, says the following about cash-out refinance for debt consolidation as follows:

The Federal Housing Finance Agency (FHFA) has increased conventional loan limits to $806,500 for 2024. This was the eighth increase in conforming loan limits in the past three years.

High-balance conforming loan limits increased to $1,209,750 in high-conforming areas. High-balance VA loan limits followed high-balance conforming loan limits and increased to $1,209,750. Due to increased home prices, HUD has increased FHA loan limits to $524,225. This blog will discuss debt consolidation cash-out refinance mortgage guidelines for the various loan programs. A cash-out refinance for debt consolidation can quickly merge multiple high-interest debts into a single lower-rate mortgage, but not all borrowers benefit. Here’s how it works and what you should consider: 

How Cash-Out Refinance for debt consolidation Works

• Definition: A cash-out refinance means you get a new mortgage for more than your current mortgage balance. You pay off your existing debts with the cash received. 
• Example: If you owe $200,000 on a home valued at $300,000, you can refinance to $250,000. This will allow you to pay off your debts using the $50,000. 
• New Loan: A borrower will have a new mortgage account and a fresh loan towards a higher amount. The interest rate should be lower than the borrower’s previous debts. 

Why is cash-out refinance for debt consolidation tempting?

• Lower Rates: Current mortgage rates (6% today) are far better than credit card APRs (often 15-25%) and personal loans (10-20%).
• One Payment: Instead of dealing with multiple payments for Accounts Receivable, you now only have a single mortgage payment to make.
• Tax Right Off: Interest while taking a mortgage is potentially deductible (if you itemize) while paying credit card bills is not.
• Cash Flow: Reduced payments for the month help generate some extra cash.

cash-out refinance for debt consolidation: The Math

Let’s assume a person has $30,000 in credit card debt at 20% (with a minimum payment of $500 per month) and a $200,000 mortgage at 5% ($1,073 per month over 30 years). That’s a total of $1,573 in monthly payments. Refinance to $230,000 at 6%? With a new payment of ~$1,378, you save $195 each month, eliminate the credit card debt, and extend its cost over 30 years.

Risks on cash-out refinance for debt consolidation To Watch

• Equity Drain: You are losing home equity for cash. If housing prices drop, you risk becoming underwater (owing more than it is worth).
• Longer Debt Life: Paying off a $30,000 credit card balance over 30 years at 6% costs $62,000, while paying it off over 5 years at 20% costs $48,000. It’s cheaper monthly but expensive over time.
• Closing Costs: 2-5% of the loan amount ($4,600-$11,500 on $230,000). If savings don’t offset this expense, it’s a loss.
• Foreclosure Risk: You’ll get annoying calls if you miss credit card payments. But if you miss mortgage payments, you can lose your house. The debt is now secured.
• Temptation: Eliminating credit card debt leads to increased spending on those cards—a debt whammy.

When It Makes Sense

• High-Interest Debt: It can be advantageous to consolidate debts with an APR above 15% into a 6% mortgage if you can make the new payment.
• Solid Equity: Lenders cap you at an 80-85% loan-to-value ratio (LTV). If your home is worth $300,000, the max loan you can get is around $240,000-$255,000.
• Discipline: You will not incur additional debt after refinancing.
• Long-Term Stay: If you plan to stay in the house, closing costs are amortized over multiple years. If you need to sell the home quickly, the costs will eat up your savings.

Steps to Pull It Off

• Check equity is the home’s value minus the mortgage balance. Lenders will not guess, and appraisals will confirm this.
• Credit Score: 580 or more for an FHA and 620 or more for a conventional loan. Higher scores (760 and above) secure better rates.
• Shop Rates: Look at the APR from 3 to 5 lenders, including terms for cash-out, as some lenders charge more for this.
• Run Numbers: Adding a new mortgage payment with closing costs and comparing it to old debt payments can be calculated with online calculators.
• Apply: The process takes 30 to 45 days to close. Proof of income, debt, and a clean credit report is mandatory.

Alternatives to Cash-Out Refinance for Debt Consolidation

• Home Equity Loan/HELOC: This allows for borrowing against equity while the first mortgage remains intact. You get to keep the original loan rate even if rates (7-9%) are higher.
• Credit cards do not need equity, but cash cannot be put into the plan, and credit counselors cannot negotiate lower rates with creditors.
• A 0% balance transfer can be a short-term solution if you have strong credit and small debt.
• A cash-out refi could help you manage debt if your equity is high, the rates are good, and you do not spend much. However, it is a risky option.
• Consider the numbers very carefully. What is your current debt, and what is your home valued at?

Cash-Out Refinance for debt consolidation To Lower Monthly Payments

Many high-income wage earners still live paycheck-to-paycheck. Interest rates on credit card debt can exceed 20%. No matter how many monthly payments you make on your credit card, paying down the balance is next to impossible due to the high interest rates. Average monthly auto loan payments can easily exceed $400 per month. Most professionals have high student loan debt.

Lowering Monthly Payments With Debt Consolidation Cash-Out Refinance Loans

If you add these minimum monthly payments, it can become a significant amount and add or build stress. Debt consolidation cash-out refinance may be a solution for homeowners to lower their monthly household payments substantially.

Debt consolidation cash-out refinance is a great option for homeowners with home equity. Credit card interest rates are substantially higher than mortgage interest rates.

Homeowners with home equity can greatly benefit from debt consolidation cash-out refinance. The terms on a mortgage are substantially longer than those on other high-ticket credit tradelines. Homeowners can deduct mortgage interest from their income tax returns. Consumers cannot deduct credit card interest from their income tax returns.

Debt Consolidation Cash-Out Refinance Benefits For Homeowners

For example, a $30,000 car loan has an average $400.00 monthly payment. It is so much because most car payments are amortized over 36 to 60 months. However, most mortgage payments are amortized over 30 years. A $30,000 monthly mortgage loan balance has an average monthly mortgage payment of $150.

If a homeowner would cash out $30,000 on their refinance, it would add $150 per month but would eliminate the $400 auto payment if the homeowner would pay off the car note with the refinance proceeds.

This would mean a $350 monthly savings. Mortgage interest rates are substantially lower than auto, student loans, credit cards, installment loans, and other creditors. Every loan program has different maximum loan-to-value debt consolidation cash-out refinance guidelines.

Fannie Mae and Freddie Mac Debt Consolidation Cash-Out Refinance Guidelines

Fannie Mae and Freddie Mac set conventional mortgage guidelines. Here are the loan-to-value caps on conventional loans: The maximum loan-to-value on cash-out refinance mortgages on conventional loans on primary residences is 80% LTV. No private mortgage insurance on loan-to-value of 80% or lower on conventional loans. Investment properties have a maximum of 75% LTV on cash-out refinance mortgages. There is a minimum of a six-month waiting period to do a cash-out refinance mortgage from the original closing date on conventional loans.

HUD Debt Consolidation Cash-Out Refinance Guidelines

HUD is the parent agency of FHA. Borrowers can do cash-out refinance mortgages with FHA loans. The maximum loan-to-value on a cash-out refinance on FHA mortgages is capped at 80% LTV. There is a minimum 12-month waiting period to do a cash-out refinance mortgage from the original closing date on FHA loans.

VA Debt Consolidation Cash-Out Refinance Requirements

VA loans are limited to active and retired spouses of deceased veterans of the U.S. Armed Services. The VA allows 100% LTV on cash-out refinance mortgages. VA mortgage interest rates are among the lowest of any other loan program due to the VA guarantee. Here are some additional benefits of doing a debt consolidation cash-out refinance on VA loans. Homeowners can skip up to two monthly mortgage payments.

Pay off all consumer monthly debts and have overall lower monthly payments. Refinancing an FHA loan into a VA loan makes the HUD refund possible, and no annual mortgage insurance.

Consolidate all of your monthly payments with the new mortgage payment. You could potentially get a refund of the current escrow balance for extra cash in your pocket. For more information on this topic or other mortgage-related subjects, please get in touch with us at Mortgage Lenders for Bad Credit at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available evenings, weekends, and holidays seven days a week.