If you’re in debt and a homeowner, then a cashout refinance may be one of the best ways you can do a debt consolidation. Bad consumer debt such as credit cards can become overwhelming, and one of the ways you can regain control of your finances is to pay off high interest rate debt by doing a cashout refinance on your home. That being said, you do have to have equity in your home and have to have good enough credit to qualify. As is the case with any type of loan, debt consolidation or otherwise, using a cashout refinance as a debt consolidation solution has its good and its bad parts.
Benefits of Debt Consolidation with a Cashout Refinance
One of the primary benefits of using a cashout refinance as debt consolidation is that the interest rate on the refinance is typically lower than the interest rates you’re paying on personal loans, auto loans, and credit cards—the debts you are consolidating. The second primary benefit is that home mortgages tend to be tax deductible. Generally, you can deduct the interest you pay on a home mortgage from your federal tax returns, which is not something you can generally do with credit card interest. Using a cashout refinance to pay off and consolidate debt turns multiple monthly payments into one payment per month, so it makes paying bills much faster and easier.
Disadvantages of Debt Consolidation with a Cashout Refinance
While there are several advantages of using a cashout refinance as a form of debt consolidation, drawbacks to the method also exist. First, debt consolidation doesn’t change your financial habits, which is what got you in debt in the first place. Many who consolidate debt find themselves back in debt again if they don’t change the way they manage their money. Second, a cashout refinance requires your home as collateral, so if you default on the loan, you may be heading toward foreclosure. Some financial advisors say that tackling debt one item at a time over debt consolidation is a more cost-efficient way to go in the long run.
A cashout refinance can make consolidating debt faster and easier, but there are some pitfalls to beware. Whether you choose a cashout refinance or another form of debt consolidation, make sure that you learn new spending habits and ways to manage your finances. This is the part of a debt consolidation that helps you to stay out of financial debt. Research your other debt consolidations carefully, shop with your current lender and other lenders for a cashout refinance, and then choose which debt consolidation move is the right one for you.