Are your student loans and credit card bills devouring your monthly income? Do you have so many bills that it’s hard to even keep track of them anymore, let alone make the necessary payments? High interest rates got you, and your spending money, down?
Maybe it’s time to look into consolidating your debt into one monthly payment by refinancing your mortgage! Here are a few things to think about:
- By transferring your unsecured debts (like credit card debts or student loans) into secured debt (like your mortgage) your interest rate and monthly payments are likely to go down.
- Depending on how much equity you have in your home, you might even be able to take out some extra cash for home improvements and other such projects.
- If you got a Fixed Rate Mortgage when interest rates were high, or your Adjustable Rate Mortgage is about to become fully indexed, you may be able to kill two birds with one stone with a cash-out refinance to a lower interest rate.
- You may be able to finance the closing costs, so you don’t necessarily need to have a lot of cash on hand.
- In some cases the interest charged on your home mortgage loan is tax deductible, so you may be able to save some money on April 15th.
You can say goodbye to those high-interest credit card debts and the ever-pesky student loan payments by transferring your debt to a home mortgage loan. Let Homestar Financial help you get the best interest rate on the best loan for your financial situation!
And debt consolidation isn’t just for people with huge credit card bills or student loan payments. If you’ve had an accident and racked up some pretty ugly medical bills, you’re living on a fixed income and need to keep your bills manageable, or you’ve found yourself in any of a number of sticky financial situations, you might want to consider refinancing to bundle all of your debt into one neat package. That way you’ll be able to plan your monthly budget around one bill instead of several, saving you time and headaches; and the interest rate will likely be lower, so you’ll save money as well!
So if you’re sick of paying 15% to 20% interest on your credit card balance each month, or you prefer the sweet simplicity of paying one bill instead of ten, call Homestar Financial to speak to a professional loan officer about your Refinance today. Every month you wait could be another 20% interest charge that you could do without.
How can refinancing to consolidate your debt work for you?
Let’s say that you took out a home mortgage loan for 80% of the original property value of your home ($250,000) 6 years ago. Your original loan amount was $200,000. Since then your property value has appreciated to $300,000, you’ve paid off about $10,000 of the principal, and you’ve run up $40,000 in credit card debt.
Refinancing to a 30-year Fixed Rate Mortgage
Now, instead of paying 19% interest on your credit card debt, you can refinance your home mortgage loan and take out an extra $40,000 to pay off those credit card companies. Also, if you refinanced when interest rates were significantly lower than when you took out your original loan, you monthly payment may go down significantly!
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Current Mortgage
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Refinance / Debt Consolidation
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Loan Balance
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$190,500
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$235,500
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Original Balance:
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$190,500
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Monthly Payment:
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$1,537
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$1,489
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Credit Card Debt:
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$40,000
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Credit Card Debt:
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$40,000
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$0
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Closing Costs:
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$5,000
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Minimum Payment:
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$1,200
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$0
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$235,500
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Total Monthly Payment:
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$2,737
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$1,489
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Total Monthly Savings:
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$1,248
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Total Yearly Savings:
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$14,976
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Despite a higher balance, your monthly home mortgage loan payment has gone down by $48. Best of all, your credit card bills are gone! If your minimum payment was 3% (the national average) of the balance, that amounted to $1,200.00 just this month. So, in the first month of your refinanced home mortgage loan you have saved $1,248. In just the first year you have saved $14,976!
Is Consolidating Debt by Refinancing Worth the Cost?
This is an important question to ask when considering a refinance. You want to see when the money you save by reducing the interest rate offsets the cost of the refinance. This is called the break-even point. The rule of thumb is: refinancing is worth it if you reach the break-even point within two years. This number may go up if you plan to stay in your home a long time, or down if you plan to leave soon.
The cost of refinancing is usually between 2% and 4% of the loan amount, though the percentages get lower as the loan amount increases. So let’s say that refinancing $230,500 to a 30-year Fixed Rate Mortgage would cost around $5,000. By standard calculations it will take about 9 years for you to reach the break-even point. But this does not take into consideration the money you have saved by paying off your higher-interest debt! The above table shows that you will save $14,976 per year. Since it would take you 4 years of $1,200 monthly payments to pay off the credit card, let’s extend that savings into the next 3 years. The total savings for the 4 years that it would have taken to pay off your credit card is about $60,000. The savings for the rest of the loan period is about $11,000. That brings the total savings to $71,000. If you divide this overall savings out over 30 years, you will find the annual savings to be about $2,400 per year. So you will be able to pay off the cost of the refinance in a little over two years!
Refinancing to a 15-year Fixed Rate Mortgage
The above example assumes that you want to save money and lower your monthly payments substantially by refinancing to another 30-year mortgage. If you’re willing to make slightly higher payments (though still lower than the payments you were making on both your mortgage and your credit card), you can refinance to a 15-year mortgage and pay off all of your debts much quicker, cutting the total interest you will pay considerably:
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Principal
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Rate
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This Month’s
Payment
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Time to repay
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Total
interest paid
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Original 30-year loan
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$190,500
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8.5%
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$1,537
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28 years
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$316,873
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Credit card bills
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$40,000
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19%
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$1,200
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4 years
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$17,315
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Refinanced 15-year loan
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$235,500
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6.5%
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$2,051
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15 years
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$133,478
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Original monthly bills:
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$2,737
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Savings this month
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$686
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Total interest savings:
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$200.710
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You can see that not only are you out of debt much earlier than you anticipated, you have saved $200,710 in interest charges!
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