Cash-Out Refinance Loans and Credit Card Debt

October 15, 2019

FHA refinance loans can be used to do a variety of things, and FHA cash-out refinancing is the kind of refi loan with multiple options. But what CAN be done with an FHA cash-out refinance loan and what SHOULD be done may be two different things.

For example, some homeowners want to pay off excess credit card debt and view cash-out refinancing as a good way to do that. But who is right for this type of refinance and who benefits the most from using it to pay off credit cards?

The short answer is, it depends. If you have not owned your home for very long, will a cash-out refinance leave enough left over after paying off the original loan?

Remember that cash-out refi loans require an appraisal so the current value of your home will be evaluated along with the size of your remaining mortgage.

Those who have owned their homes and paid longer on their mortgages would do better with a cash-out refinance loan to pay off other debt. And that’s simply because there is more money to get from the loan as opposed to someone who hasn’t put much of a dent in their outstanding balance.

Another consideration to remember when trying to decide if it’s a good idea to use cash-out refinance loan money to pay off other debt?

How much your new loan costs you versus how much you are able to pay off. If you have good credit and qualify for a lower possible interest rate and have reasonable closing costs, it may make sense to do a cash-out refinance loan and pay off the cards.

That’s not the same situation in cases where the applicant is someone who won’t really get ahead by refinancing because of higher interest rates and closing costs that eat too much of your available cash.

The bottom line is that you need to run the numbers on any new loan to see how the closing costs, interest rates, and other sums affect your bottom line with the stated goal of getting ahead on your credit cards.

Pay too much up front and the loan may not make sense. Ditto in cases where your home isn’t worth enough at appraisal time, and in situations where you simply haven’t made enough payments to justify more cash back on the refi transaction.

Knowing your specific needs and goals for a home loan is key to avoiding borrower’s remorse. Do you refi loan homework to make sure this is the right type of mortgage for you.

Remember there are plenty of other FHA home loan options for those who need specific things done with the home including repairs, upgrades, and energy-saving modifications to the home. Cash-out refinancing may not be the right loan for your purposes, but there’s an FHA refinance option waiting for you.

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