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Can a mortgage refinance solve your debt problems?

[May 24, 2012.]


If you are considering mortgage refinancing as a way to improve your cash flow or eliminate debt, you'll first have to find out if you can qualify for a new mortgage. Your refinance approval will be based on your credit qualifications and your home equity. If you have a low balance on your mortgage loan relative to your home value, a cash-out refinance could be the fastest way to pay off other debt. If your equity is too low, you may still want to look into the benefit of reducing your mortgage payments with mortgage refinancing.

According to Freddie Mac, in the fourth quarter of 2011, just 15 percent of homeowners did a cash-out refinance, compared to an average of 46 percent of refinancing homeowners between 1985 and 2010.

For a cash-out refinance, you'll need at least ten percent or more in home equity, depending on the loan program and other factors such as your credit history, job stability and debt-to-income ratio.

Mortgage refinancing and debt elimination

A "rate-and-term" refinance, which simply means that you are refinancing your remaining mortgage balance, could help you gain greater control of your finances. You can use mortgage refinancing as part of a general debt reduction plan if you are able to qualify for a new mortgage that will lower your monthly savings.

You'll need the discipline to apply the savings on your housing payments to pay down other debt more quickly and some more discipline to stop overspending.

Just remember that a mortgage refinance requires fees and closing costs. Discuss your options with mortgage lenders for wrapping the refinance costs into your new loan balance or paying a slightly higher interest rate to cover the closing costs in order to avoid paying in cash.

If you are considering mortgage refinancing, be sure to compare all your options and the fees with several mortgage lenders.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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