Explore How You Could Use Real Estate to Have a Tight Grip on Your Debt?

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If you are having overpowering unsecured debts like high credit card outstanding balances then your top priority must necessarily be to effectively minimize and mitigate the debt to the extent possible at the earliest. If you hold on to the debt for a longer time, you would have to go on paying more and more interest unnecessarily. In this connection, everyone knows that credit card debts come with incredibly high-interest rates in the current financial industry.

Eliminating that exorbitantly high-priced debt is quite a great idea from the theoretical point of view but identifying the right finances for doing so could be quite tough. Suppose you are owning residential property, one effective way of reducing your overall balances or at least, lowering the rates you seem to be paying so far, is to use your home equity. You could achieve this by simply refinancing your present mortgage, taking out a suitable home equity loan, or cash-out refinancing.

Refinancing Your Present Mortgage

During the first quarter of the current year, as per stats presented by https://www.statista.com, the mortgage rate of interest was 4.37%. The mortgage interest rate seems to be at a record low hence, you could consider refinancing your already existing mortgage at a relatively lower interest rate to effectively reduce your monthly obligations. You would save substantial money this way. You could keep aside the savings as emergency money or use it to pay off some other debt.

Advantage

  • A lower interest rate would automatically mean you could be saving money throughout the loan term and that should be freeing up crucial cash to be used for some emergency purpose or for paying off existing debts.
  • Refinancing could result in extending the loan repayment term that could further reduce your overall monthly obligation.

Disadvantage

  • Refinancing would cost you money. Refinancing involves points & origination charges, closing costs, and fees for surveys and appraisals.
  • Refinancing would be extending your loan repayment period resulting in more years of debt repayment hence, you would end up paying more interest in the long run. You may get in touch with reliable companies such as NationaldebtRelief.com for perfect debt solutions. 

Cash-Out Refinancing

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There is another effective strategy that is quite popular these days. You simply need to take out relatively bigger and a new mortgage for paying off your old mortgage and this should be leaving you with some cash at closing for paying off some of your other existing debts, bills or obligations. This option is referred to as cash-out refinance and it necessitates that you are having adequate equity in your property. In this connection, you must understand that your equity would be the actual difference between the amount you owe on a property and the current market value of it.

For instance, if the value of your property is $300,000 and you seem to owe $250,000 on your existing mortgage, you have the option of refinancing the mortgage for paying off other debts by taking out the difference.

Once the refinancing process is done, you would be owing to your primary lender alone rather than a host of credit card companies and third-party lenders. This is essentially debt consolidation. In this process, you would need to pull equity from your property for paying off multiple bills and minimizing the number of bills and creditors that you have. 

Apart from simplifying your monthly payments, we understand that this technique would also provide another major advantage: savings. It implies that when you roll your existing credit card debt straightaway into a mortgage it would culminate in instant monthly savings. 

However, cash-out refinancing seems to have a major drawback. You end up binding all your unsecured debts with your property or home and in the process have ended up compromising your home’s equity. You would be at an increased risk of facing closure if you falter on your mortgage payments. Moreover, there is every chance of you going ‘underwater’ or having a house whose value would be less as compared to the amount you owe your bank.

Advantage

  • You could enjoy savings by cutting down your interest rate.
  • You could effectively reduce the number of monthly payments.
  • Since you could deduct mortgage interest on income taxes, it is a smart way of converting some non-deductible debts into ones that could be deducted. This could reasonably reduce the overall amount you would be paying in terms of federal tax.
  • You may qualify for relatively lower monthly payments simply by rolling all your debts into a single one. This provides you an opportunity to get substantial savings or pay off your existing mortgage before time.

Disadvantage

  • If you are combining multiple debts into one new mortgage and if the debts that are being rolled are the outcome of habitual overspending, it is essential for you to modify your ways or gradually your financial condition is bound to get worse.
  • Refinancing could cost about 3% to 5% of your loan’s principal. Moreover, you would have to bear fees or charges associated with getting a new mortgage like application fees, charges for an appraisal, etc.
  • Once you end up cashing out your equity, it implies you would now own much less of the home. Suppose the home’s value falls, you may fail to sell it off at the mortgaged amount.
  • By converting credit card debts into a specific mortgage would imply that you are attaching an asset to your debt.
  • As per the duration of your new repayment strategy, you may ultimately spend much more in terms of total interests.

Home Equity Loans

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You may opt for a home equity loan to assist you in reducing your debt. This is called a second mortgage. If you are having equity in a property, you could use that as collateral for securing a fixed-interest rate-loan and eventually paying off all other debts. Home Equity Line of Credit and home equity loan are similar. The only difference between the two is that HELOC seems to be a revolving debt that has an adjustable rate of interest rather than a fixed interest rate. It is left to the borrower as to when this open-ended credit could be used.

Advantage

  • You may have certain tax benefits.
  • The rate of interest would be lower as compared to that of credit card or unsecured loan.

Disadvantage

  • A home equity loan would be creating the lien against your home which would be reducing your home equity.
  • You would be exposed to the risk of defaulting if you falter on your loan repayments and that could culminate in foreclosure including losing your home. In this situation, a stratagem aimed at fortifying your financial future seems to jeopardize your greatest asset.

Some Steps to Implement

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If you feel that one of the options discussed above could be the most suitable choice for you, you must take proactive steps for updating mortgage or receiving your new loan.

Here are some steps to implement: 

  • Review your overall credit situation. It is necessary for your credit to meet all the specified lender requirements to go ahead with refinancing your existing mortgage. Your credit score must be an impressive one and be at least, 720 for obtaining a favorable rate. 
  • Get your home assessed so that you could get a rough idea regarding the value of your home. Experts believe that there should be at least, 20 percent equity to opt for refinancing.

Conclusion

Once you have chosen an option, your next logical step would be to identify a bank that could work with you. You need to shop around for identifying a lender who can understand your precise requirements and even offer a fair rate of interest. The lender must be responsive, accommodative, and capable of providing you with all relevant information regarding the application process.

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