If you’re in debt, you’re not alone. NerdWallet analyzed data from the U.S. Census Bureau and the Federal Reserve Bank of New York and found the average American household has $16,061 in credit card debt.
Debt comes from a variety of places and can add up quickly. A mortgage is typically a good form of debt, but other issues – medical bills and other emergencies – can make it tough to repay what you borrow.
What is a cash-out refinance?
When you do a cash-out refinance, you get a new loan for what you owe plus the additional cash you want to take out, providing you have the equity to cover it. This can change your mortgage terms. If you opt for another 30-year loan, your cycle starts all over. But if you decide to do shorter terms, you can take time off the loan, though your monthly payment will likely go up.
If you have a second mortgage, you can roll the two loans together into one home loan and still take cash out, so long as the total is not greater than the appraised value of your home.
Control your debt and make it deductible
You can use the lump sum from your cash-out refi to pay off all sorts of debt you may hold. You can legally consolidate credit card debt with your mortgage debt to lower the interest rate, and you may reap a tax deduction for doing so. Generally speaking, up to $100,000 in debt beyond a mortgage is deductible.
Mortgage rates have been at historic lows the past five years (as low as 3.71 percent in March 2016). Compare that with the average APR (annual percentage rate) of 15.07 percent on a credit card. If you had $16,061 in credit card debt and paid 15.07 percent, you’d pay $2,420 in interest annually.
If you took a cash-out refi and combined other debt with your mortgage, you could wipe out what you owe from other sources in one fell swoop. Once you make the payment, the debt gets combined with your home loan – which could give you a lower interest rate and make it tax deductible, since you can deduct mortgage interest if you itemize on your tax return.
Make sure you can deduct debt after a cash-out refi
Consolidation makes that new debt eligible for deductions if you fit certain criteria. The home loan must be on your first or second home. You can’t write off anything above $1 million in total mortgage debt no matter how many homes you own. If you use your cash to make home improvements, the interest on your cash-out loan is deductible, too.
With a loanDepot cash-out refinance, you can lower your interest rate as well as make your debt deductible. If you’re eligible, it’s a great way to consolidate debt, gain tax deductions and get your financial house in order. Speak to a Licensed Lending Officer at (888) 983-3240 for additional information.
Published May 5, 2017
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