Cash-out refinancing accesses your home equity through a new mortgage with a bigger principal amount than the current one. You can avail for the difference amount between the principals of the two mortgages IN CASH for almost any purposes.
Use cash-out refinancing option to obtain a new mortgage with a higher principal than your debt amounts. Assume, your home values up to $100,000 and your current mortgage is $50,000 in principal. Your equity will be $50,000. Now, if you bear a damage of $20,000 on your credit card and pay an interest of 18% on it, all you have to do is opt for a refinance on a mortgage with a principal of $70,000. And benefit from the difference amount between the old principal and the new one in cash. In this scenario, you guessed it right, the amount will be $20,000. So take that money and pay off your credit card. Simple!
As soon as you clear the credit card debt, you’ll get rid of its monthly payments. The interest which you’ll pay now for the current debt of the new mortgage will be comparatively much lower than the credit card of yours, saving you decent money through just reduction of interest rates. Money saved is money earned.
Caution: The most important aspect to bear in mind is that you need to get a strong control on your expenditures. Using the cash-out refinancing to get out of debts, and then going back and adding more unwanted debts will be a terrible mistake. Once you are out, stay clean. If you extensively use that credit again, you’ll be financially jumping off a cliff. At that point of time you will not have the option to reuse your home equity and save yourself again. Remember what the cash-out refinancing is connected to. Your home. You default on this loan and there are chances you might lose your precious home.
If you are a wise enough to control your spending, then cash-out refinancing can take care of your debts which you might have acquired due to some unavoidable situations. Whatever the situation has been, now you have a chance to free yourself. Cash-out refinancing can help you to finish off those high interest rate loans, replacing it with its much lower and affordable interest rates. Check all the options and details with your lenders and smartly plan out your cash-out refinancing. If you are doubtful about it, then avoid it. But if you understand it well then go ahead and lose those debts as early as you can.