Refinance Calculator: Using Your Equity to Payoff Other Debt
September 08th, 2010With consumer credit card rates as high as fifteen to twenty percent and mortgage rates near four percent many homeowners consider using equity from their home to pay off their consumer debt. Is this a wise idea? Using mortgage calculators you can determine if refinancing your home and taking cash out to payoff other debt is a good idea for your family.
How much equity?
The first step you need to take if you are considering using equity from your home to pay off other debt is to determine how much equity you can access. Under both conventional mortgage (Fannie Mae and Freddie Mac) and FHA guidelines applicants can fund loans up to 85 percent of the current value for a “cash-out” transaction. This loan to value (LTV) limit may be lower depending on your credit score and loan amount.
If the value of your home is $325,000 you can potentially borrow up to $276,250 which would be 85 percent of the value. Keep in mind you will have to pay for mortgage insurance if you use an FHA mortgage or a conventional mortgage with a LTV greater than 80 percent.
How much debt?
The next step is to determine how much debt you will be paying off. Not just the outstanding balances you will pay off but also the monthly payments on those debts you will pay off with the equity from your home. Make a list that includes the names of the creditors, the current balances and the monthly payments. Total the balances, do they exceed the amount of money you can obtain from a cash-out refinance? If so then choose which balances you wish to pay off.
Write down the total monthly savings you will have for the debts you will be paying off. Once you know the savings from the consumer debt you will be paying off you can use an amortization calculator to determine how much you can save by transferring your credit card payments to a mortgage payment.
How much savings?
Once you know the amount of your refinance mortgage use the refinance calculator to determine your new monthly payment. Input the information for your existing mortgage and the information for your refinance mortgage; under the section “cash out” enter the amount of credit debt you will be paying off. Hit “Calculate” and a new page will appear comparing your current mortgage to a cash out mortgage.
Did your monthly mortgage payment go down or up? If it went down then you are in a position to save a tremendous amount of money using a cash-out refinance to consolidate your consumer debt. If the payment went up did it go up more than the amount of money you will be saving with no more monthly credit card and other debt payments? If it did then you probably should not consolidate your debt with a refinance mortgage. If the new mortgage payment is less than your current mortgage payment plus the monthly payment obligations on the debt you will pay off then you might want to consider a debt consolidation refinance.
Even more savings
One question that you should ask yourself if you are using equity to consolidate your debt is “What will I do with the savings?” For some the breathing room from the reduced payments is greatly needed due to decline in household income or other expenses that have come up. For many however the monthly savings is just that, savings. But how best to utilize the savings to get the most out of leveraging the equity in your home to consolidate debt?
A savings calculator can show you how much money you can accumulate over the next several years by investing your monthly savings, but given the low rates of return currently available the returns may not be that great. You can leverage the return even higher if the funds are targeted to a tax free retirement account if you are eligible or a qualified education fund for your children.
Maximize your savings
Remember when you refinance to include paying off your consumer debt obligations you are converting all of those debts to a 30-year mortgage and will pay interest on those debts for 30 years, unless you pay off the mortgage sooner. Not spending the monthly savings from your consolidation refinance however will allow you to save even more money, potentially several tens of thousands of dollars.
Keep making the same total monthly payment as you are now but instead of paying the interest and payments to a mortgage and several other creditors target all the funds to your new mortgage. This will pay down your mortgage faster and shave years off the term of your mortgage. Using the amortization calculator change the input for years on the mortgage until you come up with a monthly mortgage payment that is near what you are paying on your current mortgage and the debt you will be consolidating.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.
