How to Take Advantage of a Blended Rate to Tackle High-Interest Debt

3.21.2024 | Category: Homebuying

Do you have several loans with high interest or even variable interest rates? Are you looking to make managing your debt easier with one monthly payment instead of several? Have you earned a healthy amount of home equity and are looking to put it to use?

With home mortgage rates still trending lower than most average credit card interest rates, student loan rates and even some car loans, you may want to leverage your home equity to pay off high interest debts.

Using a refinance home loan to consolidate your debt may give you the opportunity to save money in interest payments. It may also help you manage all your accounts in one place, avoid late payments or penalty fees and pay down debt faster.

Paying down debt is one of the most common reasons for homeowners to tap into their equity and is an easy way to lower your debt payments and help you meet your financial goals.

Benefits of Using a Cash-Out Refi to Pay Down Debt

Using your home’s equity as the vehicle to consolidate your debt may give you the opportunity to secure favorable loan terms and save money.

Take John for example – John has several loans, all at different interest rates, that he has to manage every month.

• John has a $300,000 mortgage at 3% interest rate, and his home is valued at $710,000.
• John also has a $150,000 student loan at 12% interest.
• John has $55,000 in credit card debt at 21% interest
• He also has a $25,000 loan on camper at 14% interest.
• John’s total debt is $530,000.

To better illustrate John’s debt, let’s calculate his blended rate.

The blended rate is a dollar weighted average:

• 56% of John's debt is his mortgage and that balance has an interest rate of 3%.
• 28% of John’s debt is student loans with a 12% interest rate.
• 11% of John’s debt is from credit cards with an interest rate of 15%.
• 5% of John’s debt is from the camper with an 14% interest rate.

John’s blended rate on his debt of $530,000 is 7.9%

If John takes advantage of the equity he’s built in his home, he can pull out $200,000 in equity and refinance his home at a 7.000% interest rate (7.213 APR), P&I = $3,326. This eliminates his high interest debt and consolidates it into a new low monthly payment.

Assumptions: Loan Amount: $300,000 | Loan Purpose: Rate/Term Refinance | Property Type: Single Family Residence | FICO: 780+ | Escrow Account Required: Yes, taxes & insurance

Rates and terms displayed are used as an example. APR may vary. Not all borrowers qualify for all programs, must meet underwriting guidelines and are subject to credit review and approval. This does not constitute a commitment to lend. For mortgage loans other than fixed loans, it is possible that the borrower’s payment may increase substantially after consummation. The disclosed fees are estimates. Actual closing costs and the portion paid by Seller may vary. Payment amounts shown do not include amounts for taxes and insurance premiums, if applicable. Actual payment obligation will be higher.

What to Know Before Refinancing Your Mortgage to Pay Off Debt

When you refinance your mortgage loan to pay off high interest debt, you give yourself the opportunity to replace your high-interest loans with one, easily manageable payment that is likely lower than your revolving lines of credit. This is especially true if you have credit card debt, which notoriously comes with high interest fees. Tapping your home’s equity can help you pay down your debt with a lower rate, while paying your mortgage every month.

If you’re interested in refinancing your home loan to pay off high-interest debt, consider the following factors to know if this is an option ideal for your financial situation.

• Earned Equity in Your Home

In order to access the equity in your home, your existing mortgage loan will need to have enough equity earned to qualify, usually about 20% equity in your home. This means your loan balance can’t exceed more than 80% of your home’s value.

• Debt-to-Income Ratio

Like any home loan, you will need to ensure your debt-to-income ratio is in good standing before applying for a refinance loan. Generally, a good DTI is roughly 43% and is calculated by dividing the total of your monthly debt payments by your income. For this reason, you will also need to have steady income to show the lender to qualify you for a refinance.

• Credit

Your credit will also be checked to assess your risk, but you don’t need top tier credit to qualify. As long as your debt-to-income ratio qualifies you for a refinance, and your home loan is in good standing, an average credit score approximately 650 or above will likely qualify you for a refinance.

• Timeline

It’s important to know you won’t be able to access the cash immediately. You will go through a process similar to your first home loan. You will need to apply, have your loan go through escrow and will need to close before you receive your funds. Most lenders can process a refinance in less than 30 days but you will want to be sure to coordinate quickly if you’re hoping to close your loan in a timely manner.

• Closing Costs

Like the first time you closed on your home loan, you will be responsible for paying closing costs such as an appraisal or title fee. You can usually roll the costs into your refinanced loan but this could make your monthly payment higher and it’s important to budget for this before you apply for a refinance.

With home values at historic highs, many homeowners are sitting on an unprecedented amount of equity, making now a great time to consider a refinance. 

Interested in learning more about your mortgage loan options? Click here to visit Mutual of Omaha Mortgage's full list of purchase loan offerings and get started today!