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This Could Be the Best Way to Pay Off Holiday Debt and Lower Your Housing Costs

The Motley Fool
The Motley Fool
 2022-01-22

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If you closed out 2021 with a pile of holiday debt, you're no doubt in good company. It's hard to keep spending down during the holidays, and this year in particular, there were fewer deals to be had due to supply chain issues.

Of course, starting a new year off with debt isn't ideal. But if you own a home, there may be an easy way for you to knock out your holiday debt and lower your mortgage payments at the same time.

Time for a new mortgage?

You may be familiar with the concept of refinancing a mortgage . It's when you swap an existing home loan for a new one with more favorable terms.

When you do a cash-out refinance , you trade in your existing mortgage for a new one, only you borrow more than what you owe on your existing home loan. You can then use that extra cash for any purpose, whether it's renovating or paying down that pesky holiday debt.

To qualify for a cash-out refinance, you'll need to have a decent amount of equity in your home. Equity refers to the portion of your home you own outright, and it's calculated by taking your home's market value and subtracting your mortgage balance.

These days, homeowners across the U.S. are sitting on a record level of equity due to high home values. As a result, there's a good chance you'll be in a strong position to qualify for a cash-out refinance. And if you don't have too much holiday debt, you might manage to take cash out of your home while lowering your mortgage payments at the same time.

Let's imagine you owe $200,000 on your mortgage and your home is worth $300,000. Let's also assume you owe $10,000 in holiday debt. You might easily qualify for a cash-out refinance of $210,000 based on your home's value.

Now, let's say you're paying 4.5% interest on your $200,000 mortgage and you have a 30-year loan. That means you're paying $1,013 a month for principal and interest. If you were to do a cash-out refinance for $210,000 but lower your interest rate to 3.6% on a new 30-year loan, you'd be left with a monthly payment of $955 for principal and interest. Meanwhile, you'd also walk away with a check for $10,000 to pay off your holiday debt. You can use a mortgage calculator to find out how much you could save by refinancing.

Is a cash-out refinance right for you?

A cash-out refinance could be a good way to lower your monthly mortgage payments and get rid of recent debt. That said, you'll pay closing costs to swap your current mortgage for a new one, so you'll need to run the numbers and make sure paying them makes sense.

If you think you might move in the near term, you may want to hold off on refinancing and find another way to eliminate your holiday debt. But if you have every intention of staying put, then a cash-out refinance could be a great solution for you.

A historic opportunity to potentially save thousands on your mortgage

Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.

Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!).

Read our free review

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