If you want to get a debt consolidation loan to repay credit card debt, and you own a home, should you get a new mortgage, or do a cash out refinance on your existing mortgage?
Both are forms of debt consolidation; here is how they work.
If you own a home with sufficient equity, you could get a new mortgage to pay off the old one. If your current mortgage is $100,000, and you need $50,000 to repay your credit card debts, you could get a new, $150,000 first mortgage. The first $100,000 goes to repay your existing mortgage, and the additional $50,000 goes towards your credit card debt. You end up with no credit card debt, and a $150,000 mortgage.
In a debt consolidation loan through a cash out refinance deal, instead of getting a new consolidated first mortgage, you get a new second mortgage. Continuing our previous example, instead of getting a new $150,000 first mortgage, you keep your $100,000 mortgage and get a new second mortgage for $50,000. You are getting cash out of your house, which is why it is called cash out refinancing.
Which is a better deal? The answer depends on a number of factors, including interest rates.
If your current first mortgage is at a low interest rate, you probably want to keep it in place; borrow the extra money you need with a new second mortgage. However, if your first mortgage is at a higher interest rate, and you can negotiate a lower combined rate on a new mortgage, the new mortgage may be the way to go. Beware of the fees and penalties to break your mortgage, which must be factored into the calculation.
Other factors to consider will be the length of the remaining term on your mortgage, and your tax bracket, since in the United States interest on your mortgage on your home is tax deductible, so mortgage debt is preferable to credit card debt.
Consult a mortgage expert to help you make the decision. Either way, a mortgage almost always has a lower interest rate than your credit cards, so whether it is a cash out refinance or a consolidation on your existing mortgage, evaluate your options, and pick the one that is best for you.
Bernard Johnson has many years experience advising people on debt consolidation loans. Visit http://www.debt-consolidation-loans-information.com for information about refinance debt consolidation and how to get a debt consolidation loan
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