Debt consolidation refinances are among the most effective and cost-efficient tools one can use to reign in personal debt that has become a financial burden.  Once debt has grown beyond your means to immediately pay off, it can be easy to let it increase to debilitating levels.  

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Let's map out a hypothetical situation based closely off of one of our past client's success stories.  A family who felt the brunt of the COVID economic shutdown accumulated $25,000 in credit card balances and personal loans to support themselves, their children, and their business.  This is an all-too-common situation.  Their credit utilization is high and their cards are close to being maxed out, hurting their credit score.

 

Throw in monthly payments with interest rates in the 20s, dozens of other personal or family expenses that they need to make, a mortgage payment, and hardly anything to put in savings after it all, you have yourself a potent recipe for stress and financial anxiety. 

 

With a balance of that size, the minimum monthly payment of $521 would require over 32.5 years to fully pay off, with $178,341 paid in interest in that time.  They understand that the minimum payment set by their card holders is just barely over the amount that would cause their balances to increase rather than decrease.  So they force themselves to make extra payments whenever possible, adding a hundred or two when the budget allows.  The total balance barely drops.  Family vacations become a wistful dream, home improvements or even basic repairs are disregarded, and life suddenly becomes planned around debt payments. 

 

It can feel overwhelming, and often times, it is.

 

However, their home's value sits at $350,000 with a mortgage balance of  $100,000 and a current mortgage P&I payment of $506 (approximately a 4.5% interest rate).  That mortgage was for a home they had purchased for $150,000 five years prior, and with the blazing housing markets of 2020, 2021, and 2022, their home has quickly climbed in market value.

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By capitalizing on this equity with a $130,000 refinance, they pay off all of their high-interest debt in one move and with almost nothing paid out of pocket, the sole cost being a home appraisal if required.  Due to their damaged credit and movements in the mortgage rates, their new home loan carries a 6% P&I payment of $779.  The slew of monthly payments for their cards disappear, and after accounting for the increase in their mortgage payment, their minimum savings amount to $250 a month, while their savings on total interest they would have paid amounts to over $100,000.  Essentially, they have been handed a $3,000 check once a year to use however they please. In all likelihood, this number is significantly higher when accounting for the extra payments they made to get their balances down faster.

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They could have even chosen to put additional cash into their pockets AND save each month if desired.  A $140,000 refinance would have put north of $10,000 of tax-free cash into their accounts, while still saving a minimum of $188 a month when only counting the minimum payments.  

And after their credit scores see a significant increase in the following months after their card balances are slashed and their utilization percentage falls dramatically, they have put themselves into a prime position to reclaim a lower mortgage rate when the timing is right.  Savings accrue, financial and credit health improves, and there is peace of mind knowing that interest rate hikes can no longer affect your monthly payments on mortgage, where they absolutely could have with credit cards.  Plus, you can potentially write off mortgage interest and expenses on your taxes, whereas writing off personal debt expenses such as credit card interest has been prohibited since the 80s.

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 To summarize, a debt consolidation refinance is simply a cash out refinance which has the primary purpose of eliminating high-interest unsecured debt, which can negatively affect both credit and financial health, through the equity in your property.  Home values have skyrocketed over the past several years, allowing countless homeowners throughout the country access to extremely high levels of equity.  Many homeowners burdened by large amounts of high-interest debt, stuck making huge monthly payments that could have financed vacations or bolstered savings accounts, are not aware that a highly effective solution to their debt literally surrounds them.  If you find yourself in this situation, do not hesitate to request a free consultation with us to explore your options.