When comparing interest rates on home loans with other types of consumer debt such as credit cards or automobile loans it becomes immediately clear there’s quite a bit of difference. Why the disparity? Home loans are secured by real estate while credit cards are not. Other installment debt such as an automobile loan can also carry higher rates compared to a home loan. Consumers can always renegotiate the interest rate on a credit card or other types of debt but even then the rates are still higher than what is offered for a mortgage. That said, home owners can replace those higher rates with a lower one by refinancing an existing mortgage, pulling out extra cash during the process and paying off those high interest rate accounts. How? Here are four mortgage refinance options for consolidating debt.
Consolidate Debt with an FHA Loan
FHA loans are government-guaranteed and used to finance a primary residence. These two reasons alone mean rates on FHA mortgages are extremely competitive. When a home owner determines that refinancing an existing loan with an FHA mortgage makes financial sense, they can also take out additional cash during the mortgage refinance process and pay off credit card debt and any other debt for that matter. Home owners can take out cash with an FHA loan and do whatever they want with the proceeds. When comparing the new monthly payments as the result of debt consolidation with existing monthly payments on credit card and installment debt, the payments are much lower. FHA cash out loans limit the new loan to 85 percent of the current appraised value of the property.
Consolidate Debt with a 15-year Fixed Rate Loan
Consumer debt is most often assigned a variable rate and as interest rates in general have risen over the past couple of years so too have monthly payments for credit card debt increased. Analysts predict still more interest rate increases by the Federal Reserve and each bump in rate means higher rates in general, including home loans. When consolidating debt using a 15 year fixed rate term on any conventional, VA or FHA mortgage, refinanced monthly payments are dramatically lower, increasing cash flow for the home owner.
Consolidate Debt with a 30-year Fixed Rate Loan
Just as a consumer can consolidate debt with a 15-year fixed rate loan, so too can that individual consolidate debt with a different loan term. Fixed rate loan terms can range from 10 to 30 years in five year increments. The 30 year fixed rate term is the most common because the monthly payments are much lower compared to a shorter term loan. On a typical $200,000 mortgage, the monthly payment can be as much as 50 percent higher with a 15 year term compared to a 30 year. It’s important to understand the impact of different loan terms. This is something you should discuss thoroughly with your loan officer to determine which is the best choice for your situation.
Consolidate Debt with a VA Loan
VA loans are an excellent choice for those who are eligible. When purchasing a home with a VA loan, there is no down payment requirement and the borrowers are restricted from paying certain types of closing costs. In addition to having competitive rates, there is no monthly mortgage insurance payment required. VA mortgage refinances give borrowers the ability to take out additional cash to pay off other consumer debt by consolidating outstanding debt and reducing the overall monthly payments. VA loans are available in fixed rate as well as variable rate terms.